FIRST PACIFIC BANK LTD. v. ROBERT H.P. FUNG

Statutory interpretation - s.23(1) of the repealed Banking Ordinance (1964) read with s.129 of the Banking Ordinance, Cap.155.

In an action by a bank instituted on 9 October 1986 against a guarantor of loans and credit facilities granted by the bank to the principal debtor, the following questions were ordered to be tried as preliminary points of law under 0.33 r.3

"(i) whether the effect of s.129 of the Banking Ordinance, Cap.155, as amended by s.27 of the Banking (Amendment) Ordinance 1987 or the general law as to public policy, is that the liability of a principal debtor to the bank is enforceable by the bank as against the principal debtor notwithstanding that the liability is in respect of advances, loans or credit facilities granted by the bank or permitted to remain outstanding contrary to the provisions of s.23(1) of the repealed Banking Ordinance 1964

(ii) whether the liability of a guarantor under a guarantee in favour of a bank can in any circumstances be rendered unenforceable by the bank by reason only of a breach by the bank of s.23(1) of the repealed Banking Ordinance 1964;

(iii) whether s.27 of the Banking (Amendment) Ordinance [which came into force on 30 October 1987] had retrospective effect to 1st September 1986 [the date upon which the Banking Ordinance Cap.155 commenced]."

The Court of Appeal, in dismissing the guarantor's appeal by a majority, answered "yes" to questions (i) and (iii), and "no" to question (ii).

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J U D G M E N T

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Fuad, V.-P.:

1. This is an appeal by Mr. Robert Fung against the order of Godfrey, J. on preliminary points of law which arose in an action brought by The First Pacific Bank Limited ("the Bank") on eight contracts of guarantee to which Mr. Fung was a party as surety. The judge delivered a reserved judgment on 6 January 1989 and the order which followed his decision was made on 13 February.

2. In view of the issues which arise on the appeal it is necessary to go into the pleading in a little detail. The principal debtors (who were not sued in this action, Mr. Fung being the only defendant) were six in number and they were all customers of the Bank. Five of the principal debtors are companies incorporated in Hong Kong. The remaining principal debtor is one of the defendant's brothers.

3. The writ in this action was issued by the Bank on 9 October 1986 and it was accompanied by a Statement of Claim. The Bank pleaded the material facts showing the indebtedness of the six principal debtors (in general terms they arose out of ordinary banking advances, loans or credit facilities); their failure to pay on due demand; the terms of the eight guarantees in writing undertaken by the defendant; and the failure by him on demand to pay the sums due under the guarantees. The total amount claimed by the Bank by way of principal is something over $9.5 million. Various sums are also claimed in respect of interest.

4. By his Defence, the defendant admits the granting by the Bank of the advances, loans and credit facilities pleaded in the Statement of Claim in respect of each of the principal debtors, but denies that any of them was indebted to the Bank "or alternatively that the alleged indebtedness ... was repayable at all." To understand these and the rest of the averments in the Defence, it is helpful to read here the provisions of s.23 (1)(d) of the banking Ordinance (1964), ("the repealed Ordinance") which was repealed and replaced by the Banking Ordinance, Cap. 155 which came into force on 1 September 1996 ("the current ordinance"):

"23. (1) A bank shall not grant or permit to be outstanding -

(a) .....

(b) .....

(c) .....

(d) to any person (not being a company) and to one or more companies which are controlled by him,

any advances, loans (whether by way of deposit or otherwise) or credit facilities, including irrevocable documentary letters of credit to the extent to which they are not covered by marginal cash deposits, or give any financial guarantees or incur any other liabilities on their behalf to an aggregate amount of such advances, loans, facilities, guarantees or liabilities in excess of 25 per cent of the paid up capital and reserves of the bank:

Provided that ...."

5. The defendant pleads the material facts in relation to each principal debt and says (paras. 11, 20,29, 38, 48 and 57 of the Defence):

"The Defendant will contend that the advances, loans and credit facilities granted by the Plaintiff to [the principal debtor] were illegal by reason of the Plaintiff's breach of section 23(1)(d) of the Banking Ordinance which was then in force. In the premises the same are unenforceable as against [the principal debtor] and are irrecoverable."

6. The defendant admits the terms of each of the guarantees and that he became a party to them but makes no admission as to the date when any of them were executed. In respect of each guarantee, he pleads (in paras. 13-14, 22-23, 31-32, 40-41, 50-51 and 59-60):

"The Defendant will say that the consideration for the said Guarantee[s] was the Plaintiff's granting, or alternatively permitting to be outstanding, advances, loans and/or credit facilities to [the principal debtor] in breach of section 23(1)(d) of the Banking Ordinance."

"In the premises the said Guarantee[s] [are] unenforceable against the Defendant."

7. The defendant thus denied that he is liable to the Bank as alleged or at all.

8. By their Reply the Bank pleaded that if (which was denied) they had contravened the Provisions of s.23 (1) of the Banking Ordinance 1964 in granting or permitting to remain outstanding any advances, loans or credit facilities to any of the principal debtors, any such contravention did not render the contracts unenforceable. The Bank pleaded a reliance on s.129 of the Banking ordinance presently in force, as amended by s.27 of the Banking (Amendment) Ordinance 1987, which, they said, had retrospective effect. The guarantees were therefore enforceable. For the purposes of the hearing before Godfrey, J. the Bank agreed that the issue should be decided on the assumption that they had contravened s.23 (4).

9. For convenience I will here read s.129 of the current Ordinance:

"129. (1) The contravention of any prohibition in this Ordinance or in any Ordinance repealed by thin Ordinance on the entering into of any contract shall not render that contract unenforceable.

    (2) Subsection (1) shall be deemed to have had effect from 1 April 1976, so, however, that nothing in that subsection as read with this subsection shall have effect in relation to any legal proceedings commenced before the commencement of this Ordinance." [Emphasis added]

The words I have emphasised were inserted into subsection (1) by the Banking (Amendment) Ordinance, 1987 (Ordinance No.64 of 1987), which came into force on 30 October 1987.

10. The Bank then says that "further or in the alternative" they had exercised due diligence to avoid any such contravention (which is denied) and the liability of the principal debtors was at all material times until the coming into force of the current Ordinance enforceable by reason of s.41B of the repealed Ordinance. I read that section now:

"41B. (1) The contravention of any prohibition in this Part on the entering into of any contract shall not render that contract unenforceable against the bank if that contract was entered into in the ordinary course of the business of that bank and the person seeking to rely upon the contract had no knowledge of the contravention; and may be enforced at the instance of the bank if the court is satisfied the bank exercised all due diligence to avoid the contravention of the prohibition.

    (2) Subsection (1) shall he deemed to have had effect from 1 April 1976, so, however, that nothing in that subsection as read with this subsection shall have effect in relation to any legal proceedings commenced before 5 August 1983."

11. The Bank also pleads in the alternative that if s.23 (1) of the repealed Ordinance had been contravened and if any of the guarantees were rendered illegal, void or unenforceable (all of which was denied) the guarantees ceased to be so by the repeal of s.23 (1) on the coming into force of the current Ordinance.

12. On 24 October 1988, the Judge in Chambers, Sears, J., ordered a trial of "the preliminary issue" formulated as follows:

"(i) whether the effect of section 129 of the Banking Ordinance 1986 (Chapter 155 of the Laws of Hong Kong), as amended by section 27 of the Banking (Amendment) Ordinance 1987 or the general law as to public policy, is that the liability of a principal debtor to the bank is enforceable by the bank as against that principal debtor notwithstanding that the liability is in respect of advances, loans or credit facilities granted by the bank or permitted to remain outstanding contrary to the provisions of section 23(1) of the Banking Ordinance 1964, as mended;

(ii) whether the liability of a guarantor under a guarantee in favour of a bank can in any circumstances be rendered unenforceable by the bank by reason only of a breach by the bank of section 23(1) of the Banking Ordinance 1964, as amended;

(iii) whether sections 27 of the Banking (Amendment) Ordinance had retrospective effect to 1st September 1986;

(iv) whether any such guarantee rendered illegal, void or unenforceable as a result of any such contravention of section 23(1) of the Banking Ordinance 1964, as amended, ceased to be so illegal, void or unenforceable as against the guarantor on the repeal of the Banking Ordinance 1964 by the Banking Ordinance 1986 on 1st September 1986."

13. The matter was heard by Godfrey, J. on 5 and 6 December 1988 and he reserved judgment.

14. On 22 December 1988 Godfrey, J. caused his judicial clerk to write to Leading Counsel who had appeared before him, indicating that he proposed to refer in his judgment to clause 9 of the Banking (Amendment) Bill 1983 and to para.l (e) of the Explanatory Memorandum accompanying the Bill; to clause 133 of the Banking Bill 1986 and to the comments of the Financial Secretary thereon, together with the proposed amendments to clause 133 considered at the committee stage. The letter pointed out that these were not mentioned during argument and inquired whether either of the parties required the case to be restored to the list for further argument.

15. Leading Counsel for the defendant, Mr. Michael Thomas Q.C., replied that his client did not wish to see the case restored to the list for further argument but that he would wish the judge to know that the defendant's contention (already made known to Leading Counsel for the Bank) was that the material derived from the legislative history of the relevant Ordinance was not admissible for the purpose of construing its provisions. Counsel submitted that the law was correctly stated, in Cross: "Statutory Interpretation" (2nd Edition)at pp.150-158, particularly at pp.154-156.

16. Leading Counsel for the Bank, Mr. Robert Tang Q.C., responded by saying simply that he did not wish the case to be restored to the list for further argument.

17. In his reserved judgment (which, as we have seen, was delivered on 6 January 1989) the judge briefly summarised the claim and the defence and went on to refer in some detail to various provisions (and clauses) in:

(a) the Banking Ordinance, 1948;

(b) the Banking Bill, 1964;

(c) the Banking Ordinance, 1964;

(d) the Banking (Amendment) Bill 1983;

(e) the Deposit-taking Companies Ordinance, 1976;

(f) the Banking (Amendment) Ordinance 1983;

(g) the Banking Bill, 1986

(h) the Banking Ordinance, 1986; and

(i) the Banking (Amendment) Ordinance 1987,

tracing the legislative history of the statutory provision he had to consider.

18. The judge also referred to the Explanatory Memorandum of the Banking (Amendment) Bill 1983 and to the Financial Secretary's speech on 28 May 1986 during the second reading of the Banking Bill 1986 explaining why it was proposed to enact what became s.129 of the current Ordinance (before it was amended by ordinance No. 64 of 1987). The judge noted that the Financial Secretary had referred to the decision of the Court of Appeal in Whitehall Finance Limited v. Win and Fair Securities Company Limited Civil Appeal No. 187 of 1984, 7 February 1985 (unreported). That was a decision on the proper construction of s.22 (1) of the Deposit-taking Companies Ordinance Cap. 328, read with s.24C (2). Theses provisions appear in identical terms in s.23(1) and 41B(1) of the repealed Banking Ordinance.

19. The judge also referred to, and quoted from, p.275 of Williams and Bates: The Hong Kong Banking Ordinance 1988. He adopted, as accurate, the view of the authors that s.129(1) of the current ordinance had effectively overruled the Whitehall Finance case.

20. I mention in passing that during the course of his judgment, the judge observed that under what became s.41B of the repealed Ordinance, if the bank could not satisfy the due diligence provision, the effect of a contravention of the statutory prohibitions would render unenforceable any claim by the bank sounding in contract for the recovery of its money. [This is in effect, what was held by the Court of Appeal in the Whitehall Finance case.] The judge went on to say that if the bank could not satisfy the due diligence provision, not only would it be unable to recover its money from its customer under its contract with the customer but it would also be unable to recover from any guarantor who had guaranteed to the bank the repayment by the customer of the money owing by the customer to the bank. The judge relied upon Swan v. Bank of Scotland (1836) 10 Bligh (N.S.) 627 for this proposition.

21. The judge, recalling that the current Banking Ordinance came into force on 1 September 1986 and that the action had been instituted on 9 October 1986, said about s.129 (before it was amended by ordinance No.64 of 1987), that the fact that contracts of guarantee had been entered into to secure the repayment of loans to a customer made in contravention of the statutory prohibitions against related party lending would not render them unenforceable, at any rate if (like the contracts of guarantee in issue) they had been entered into after 1 April 1976, and the relevant legal proceedings had not been commenced before the coming into force of the current Ordinance.

The judge then added:

" I need only add that the reference, in section 129(1), to the contravention of any prohibition 'in this Ordinance' is clarified, by the Banking (Amendment) Ordinance 1987, by the addition of the words 'or in any Ordinance repealed by this Ordinance': see section 27 of the Banking (Amendment) Ordinance 1987. (The Banking Ordinance 1964 had been repealed by the Banking Ordinance 1986). This clarification, in my judgment, was obviously intended to have relation back to the time when the Banking Ordinance 1986 was originally passed.

    In the present case, the guarantees were given after 1st April 1976. The proceedings were commenced after 1st September 1986. The legislature has demonstrated that a contravention of the related party lending provisions contained in the Banking Ordinance 1986, or of the Ordinance which it repealed and replaced, is not to render contracts of guarantee unenforceable in such a case.

    That concludes the point presently in issue in favour of the creditor."

22. The judge then observed that he had been treated to some intricate arguments on such matters as illegality, public policy, and retrospectivity but since, on the clear view he had formed, none of those matters arose (the legislature having at every stage made its intentions perfectly plain) he would say nothing about them. He had referred to the legislative history of the statutory provisions he had had to consider to demonstrate the purpose behind them. He had not referred to that history to construe those provisions, which were framed in clear and unambiguous language. Had the question been one of construction (which, in his judgment, It was not) it would not have been permissible to refer to the legislative history in order to help resolve history in order to help resolve the question.

23. The Judge went on to say that the real point in issue might (and, in his judgment, should) be framed as follows:

"Is the plaintiff bank in these proceedings, commenced against the defendant guarantor on 9th October 1986 on contracts of guarantee made after 1st April 1976, entitled as against the defendant guarantor to rely on the provisions of section 129 of the Banking Ordinance 1986 (as amended by the Banking (Amendment) Ordinance 1987)?"

24. The judge concluded his judgment by saying that in the light of the legislative history and clear language of the relevant statutory provisions, that question must be decided in favour of the Bank. He found it unnecessary, and indeed undesirable, to go further than this in deciding the preliminary issues raised (in much wider terms) for determination under the order of 24 October 1988. It was not the function of the Court to decide academic questions which did not need to be resolved for the purpose of determining the real matters in issue between the parties. Such questions, when raised as preliminary issues, tended to be "unintelligible" or "unanswerable". He drew attention to the remarks of Lord Wilberforce in Allen v. Gulf Oil Refining Limited [1981] 1 All ER 353, at p.356 ([1981] AC 1001 at pp.1010-1011).

25. The judge stood the matter over to enable Counsel to consider the implications of his Judgment when he would hear submissions on the form of the order to be made and on questions of cost.

26. Junior Counsel duly appeared before the judge on 13 February 1989. It is not necessary for the purposes of this appeal to recount what transpired. After hearing submissions from Mrs. Margaret Clough, for the Bank, and from Mr. Charles Sussex, for the defendant, the judge said that he would direct that there be an inquiry as to the amount due to the Bank by way of principal and interest under the guarantees.

27. Godfrey, J.'s order dated 13 February 1989 was in these terms:

"The issue arising in this cause by the Order of the Honourable Mr. Justice Sears dated the 24th October, 1988 ordered to be tried as a preliminary issue having on the 5th and 6th December, 1988 been tried before the Honourable Mr. Justice Godfrey and the said Mr. Justice Godfrey having directed that the same be re-framed as follows:

'Is the plaintiff bank in these proceedings, commenced against the defendant guarantor on 9th October, 1986 on contracts of guarantee made after 1st April, 1976, entitled as against the defendant guarantor to rely on the provisions of section 129 of the Banking ordinance 1986 (as amended by the Banking (Amendment) Ordinance 1987)?'

and having found that the said issue should be decided in favour of the Plaintiff, and having decided that the decision of the said issue substantially disposes of the action.

THIS COURT directs that the following inquiry be made that is to say

(1) what sums are due to the Plaintiff by way of principal and interest under the said contracts of guarantee

AND the further consideration of this action is adjourned

AND the parties are to be at 1iberty to apply

AND this Court directs that the costs of the Plaintiff of this action down to the foot of this Order be taxed and paid by the Defendant to the Plaintiff."

28. Pursuant to that order, on 15 May 1989, Master Chan certified the amounts due to the Bank under the contracts of guarantee.

29. There is an outstanding summons taken out on 26 May by the Bank seeking judgment against the defendant for the amounts found to be due by Master Chan.

30. The defendant complains by his grounds of appeal that the judge reformulated the preliminary points of law. He says that the judge was bound to answer the questions ordered to be tried as preliminary issues and that he erred in posing another question in the course of his judgment and thereafter directing the question to be reframed, after the conclusion of the argument, without the consent of the parties and without giving the defendant an opportunity of advancing arguments on the reframe question. It is also said that the judge's question was unspecific and failed adequately to identify the issues of law raised by the defendant covering the legal effect of s.129 of the current Ordinance.

31. With very great respect to the judge I am bound to say that it was wrong to treat the matter in the way that he did. Sears, J. had, by his order of 24 October 1988, given "directions as to the manner in which the question or issue shall be stated (RSC O.33,r.3). That order was not varied or appealed against. If during the hearing (when this will sometimes occur) it becomes apparent that a recasting of the question is necessary or desirable to enable proper advantage to be taken of the procedure available, the judge will raise the matter with Counsel, and it would be a rare case that a reformulation could not be agreed.

32. There can be no doubt that a judge is entitled to decline to answer a particular question if he concludes that it is academic or hypothetical or because it does not arise as a result of the way other questions have been answered. However, I think that he lays himself open to legitimate criticism if he recasts the questions without giving the parties an opportunity to be heard on the matter.

33. I do not feel obliged to discuss the competing merits of the formulations to be found, respectively, in Sears, J.'s order and Godfrey, J.'s judgment. With the agreement of Counsel, this Court will attempt to answer the questions as formulated in Sears, J.'s order assisted by the arguments addressed to us.

34. The next ground of complaint is that the judge was not entitled "to refer to the reports of proceedings in the Legislative Council to demonstrate the purpose of the statutory provisions he was called upon to consider, the less so if (as he concluded) the questions were not ones of construction."

35. I have to confess that I found it difficult to understand precisely what the learned judge meant when he said he had referred to the legislative history of the statutory provisions, not as an aid to construction but merely to demonstrate the purpose behind them. Of course, I accept the judge's disclaimer that he did not use the Financial Secretary's speech as an aid to construction-he is forbidden from so doing: see, for example per Lord Diplock in Hadmor Productions Ltd. v. Hamilton [1983] AC 191, at p.232 G-H and per Viscount Dilhorne in Davis v. Johnson [1979] AC 264 at p.337. In the latter case, at p.345, Lord Salmon had this to say:

"I also agree that it has always been a well established and salutary rule that Hansard can never be referred to by counsel in court and therefore can never be relied on by the court in construing a statute or for any other purpose. The reasons for this rule have been lucidly expressed by Lord Reid in Beswick v. Beswick [1968] AC 58, 73 and also by my noble and learned friend Lord Dilhorne in his speech in this appeal."

36. I am aware that distinguished judges have confessed to taking an occasional, surreptitious look at Hansard, but in my view the better practice (having obeyed the rule clearly laid down and maintained by the House of Lords) is for judges not to make reference to speeches in the Legislative Council in their judgments for any purpose so that no misunderstanding can occur and no ground for complaint can arise.

37. I now turn to consider whether the amendments made to s.129 (1) of the current Ordinance by Ordinance No.64 of 1987 (which added a reference to repealed Ordinances) had any effect before the date upon which the 1987 Ordinance came into force.

38. It is, of course, a fundamental principle of our jurisprudence that a statute is presumed not to have retrospective effect. But this presumption is rebutted if the statute itself expressly so provides or such a construction is plainly manifested by unavoidable inference. As Mr.Thomas rightly stresses, the presumption is of particular importance here because the amending Ordinance came into force after the action with which we are concerned was instituted. It is essential that the rights of the parties should be decided on the law as it then stood unless the contrary construction is inescapable.

39. In this context it is, I think, relevant to examine s.129 of the current Ordinance as it stood before the amendment. One sees at once that there was a drafting error in s.129 (1) when the section is read as a whole, as it must be. Subsection (2) could he given no effect. The current Ordinance could not have been contravened by contracts already in force on the date of the commencment of the Ordinance.

40. Thus it is plain that the amendment was enacted to correct the obvious error which had persisted for over a year. Had there been no subsection (2), the position might have been different, but when the legislature enacted the amending Ordinance it did not state that the amendment had no effect upon pending proceedings-contrast the specific provisions to that end in subsection (2) itself and in s.41B(2) of the repealed Ordinance. Subsection (2) of s.129, before the amendment, referred back to l April 1976 and the section as a whole was therefore intended to have retrospective effect. It had none until the amendment. In my judgment it is clear, by necessary implication that the legislature did not intend the amendment to have effect only on and after the commencement date of the Ordinance by which the correction was made.

41. However, in my view, the same result is reached by another route. Let us suppose that a court were required to construe s.129 of the current Ordinance as originally enacted and in force at the time when the action was instituted. I have said that an obvious drafting error had been made. I remind myself, that well-known canons of interpretation apart, we are enjoined by s.19 of the Interpretation and General Clauses Ordinance to give "such fair, large and liberal construction" to an Ordinance "As will best ensure the attainment of the object of the Ordinance according to its true intent, meaning and spirit." Would the Court whose duty it is to give effect, if it is possible, to every provision in a statute, throw up its hands in despair and hold that despite the obvious drafting mistake, nothing can be done to give effect to subsection (2) of s.129?

42. The cases show that in order to prevent an absurd result which would defeat the plain intention of the legislature, a court may read words into a statute where they are necessarily implied by the wording already in the statute. In my judgment, the proposition at p.337 of Bennion: Statutory Interpretation (1984) is justified on the authorities he cites:"It is presumed that the legislator intends the court to apply a construction which rectifies any error in the drafting of the enactment where this is required to give effect to the legislator's, intention."

43. However, there is no doubt that the exceptional power the Court possesses to read words into a statute, to correct an obvious mistake must be exercised with great circumspection. I will now read the following passage from the speech of Lord Diplock in Jones v. Wrotham park Estates [1980] AC 74, at pp.105-6 which re-states the proper approach of a Court to a problem of the kind we have here:

"My Lords, I am not reluctant to adopt a purposive construction where to apply the literal meaning of the legislative language used would lead to results which would clearly defeat the purposes of the Act. But in doing so the task on which a court of justice is engaged remains one of construction: even where this involves reading into the Act words which are not expressly included in it. Kammins Ballrooms Co. Ltd. v. Zenith Investments (Torquary) Ltd. [1971] AC 850 provides an instance of this; but in that case the three conditions that must be fulfilled in older to justify this course were satisfied. First, it was possible to determine from a consideration of the provisions of the Act read as a whole precisely what the mischief was that it was the purpose of the Act to remedy; secondly, it was apparent that the draftsman and Parliament had by inadvertence overlooked, and so omitted to deal with, an eventuality that required to be dealt with if the purpose of the Act was to be achieved; and thirdly, it was possible to state with certainty what were the additional words that would have been inserted by the draftsman and approved by Parliament had their attention been drawn to the omission before the passed into law. Unless this third condition is fulfilled any attempt by a court of justice to repair the omission in the Act cannot be justified as an exercise of its jurisdiction to determine what is the meaning of a written law which Parliament has passed. Such an attempt crosses the boundary between construction and legislation. It becomes a usurpation of a function which under the constitution of this country is vested in the legislature to the exclusion of the courts."

44. I have already noted the plain error made by the draftsman in s.129 of the current Ordinance as it was originally enacted. When the Ordinance is read as a whole it is seen, that by s.149, the Banking Ordinance 1964 and the Deposit-taking Companies Ordinance 1976 are repealed. A Court is surely entitled to examine those repealed Ordinances. One looks at s.23 (1) of the repealed Banking Ordinance (the provisions relied upon by the defendant) and then notes that there is a provision in virtually identical terms in s.22 (1) of the repealed Deposit-taking Companies Ordinance. One then observes that s.81 (1) of the current Ordinance also imposes limitations on advances by "authorised institutions" which are, by definition (s.2(1)) banks and deposit-taking companies.

45. In the form that s. 129(1) of the current Ordinance was first enacted, there was no provision made regarding the effect of contraventions of the two repealed Ordinances in place of s.24C(2) of the Deposit-taking Companies Ordinance 1976 and s.41B of the Banking ordnance 1964, and yet by the terms of subsection (2) of s.129 the legislature made it clear that it intended to deal with contraventions of statutory provisions in force before the commencement of the current Ordinance.

46. I am bold enough to declare that it is not with the benefit of hindsight that, addressing Lord Diplock's third condition in the Wrotham Park case, I have no difficulty "in stat[ing] with certainty what were the additional words that would have been inserted by the draftsman and approved by parliament had their attention been drawn to the omission before the Bill passed into law". Once it is accepted that the legislature intended to provide as well for the effect of contraventions of statutes other than the current Banking Ordinance, since the Ordinance made provision for both banks and deposit-taking companies, having repealed the Ordinances which hitherto had governed them, there can the no doubt (other than a purely fanciful doubt)what words the legislature inadvertently omitted. The amending ordinance (No.64 of 1987) made explicit the construction which in my view is implicit in s.129 as it was first enacted.

47. I am persuaded therefore that upon the proper construction of s.129 of the current Ordinance the principal debtor, whose debts the defendant guaranteed, could not resist the enforcement of the contracts into which he entered, notwithstanding that there may have been contraventions of s.23(1) of the repealed Banking Ordinance.

48. What then in the position of the defendant as guarantor? Does either principle or authority require the Court to hold that although the principal debt may be recovered, the liabilities under the guarantee cannot he enforced?

49. Mr. Thomas submits that the contract between the Bank and the principal debtor was prohibited by the Ordinance because once the 25% limit had been reached, any subsequent granting of advances, loans etc. necessarily meant that the Bank was entering into a contract that was expressly prohibited by s.23 of the repealed Banking Ordinance. The contract was therefore void ab initio and not enforceable by either party. But this could only be so if s.129 of the current Ordinance, as I have construed it, was not in the statute. Here I think it is helpful to quote passages from the judgments of the High Court of Australia in Yango Pastoral Co. Pty. Ltd. v. First Chicago Australia Ltd. (1978) 139 CLR 410, which were cited with approval by Kerr, L.J. in Phoenix Insurance v. Halvanon Insurance [1987] 2 WLR 512, at p.558-9:

At p.413 Gibbs, A.C.J. said:

"It is often said that a contract expressly or impliedly prohibited by statute is void and unenforceable. That statement is true as general rule, but for complete accuracy it needs qualification, because it is possible for a statute in terms to prohibit a contract and yet to provide, expressly or impliedly, that the contract will be valid and enforceable. However, cases are likely to be rare in which a statute prohibits a contract but nevertheless reveals an intention that it shall be valid and enforceable, and in most cases it is sufficient to say, as has been said in many cases of authority, that the test is whether the contract is prohibited by the statute. Where a statute imposes a penalty upon the making or performance of a contract, it is a question of construction whether the statute intends to prohibit the contract in this sense, that is, to render it void and unenforceable, or whether it intends only that the penalty for which it provides shall be inflicted if the contract is made or performed."

At p.423 Mason J. had this to say:

"The principle that a contract the making of which is expressly or impliedly prohibited by statute is illegal and void is one of long standing but it has always been recognised that the principles is necessarily subject to any contrary intention manifested by the statute. It is perhaps more accurate to say that the question whether a contract prohibited by statute is void is, like the associated question whether the statute prohibits the contract, a question of statutory construction and that the principle to which I have referred does no more than enunciate the ordinary rule which will be applied when the statute itself is silent upon the question. Primarily, then, it is a matter of construing the statute and in construing the statute the court will have regard not only to its language, which may or may not touch upon the question, but also to the scope and purpose of the statute from which inferences may be drawn as to the legislative intention regarding the extent and the effect of the prohibition which the statute contains."

50. It is common ground that there is nothing in the repealed Banking Ordinance which expressly prohibits the guarantees entered into by the defendant. However there is ample authority for the proposition that there can be no recovery from a guarantor if the agreement imposing liability on the principal debtor is void as being prohibited by statute. Apart from Swan v. Bank of Scotland (1836) 10 Bligh (N.S.) 627 cited by the judge, useful cases are Coutts & Co. v. Browne-Lecky [1947] KB 104 and Heald v. O'Connor [1971] 1 WLR 497. In the last case a guarantee of a debenture which was illegal as involving financial assistance by a company in the purchase of its own shares was held to be tainted with illegality and therefore unenforceable. But in our case, although the contract with the principal debtor was prohibited, it could not possibly be regarded as having been void ab initio because s.129 allowed it to be enforced. I do not think that the defendant an derive any comfort from that line of authority.

51. It is also true that an illegal consideration will not support a contract and that the consideration here for the guarantees was the granting of advances, loans or credit facilities assumed to be in breach of s.23, of the repealed Ordinance. However, once again, it has to be borne in mind that the prohibited acts do not render contracts entered into by the principal debtor void and unenforceable.

52. The defendant relies solely on the contravention of prohibitions in s.23 (1) of the repealed Ordinance for his defence, and paras. (i), (ii) and (iv) of the preliminary points of law are limited to a consideration of the effect of that section. First and last it is the Ordinance which has to be examined and construed to determine whether the legislature, having made express provision that the primary debt shall be recoverable (so that the happy result to the debtor of a windfall is denied) evidenced an intention that a contract which guarantees that very debt, without which the loan etc. might never have been made, or permitted to remain outstanding, shall nevertheless be unenforceable. A Court must, in my view, lean against a construction which leads to such an unjust and inconvenient result unless it cannot be avoided.

53. A guarantee, of course, requires a valid principal obligation, but it would be to ignore the intent made so plain by the words used by the legislature to hold that the principal obligation was not to be treated as valid notwithstanding any contravention there might have been of the prohibitions in s.23(1) of the repealed Ordinance, or indeed, of any contravention of s.81 of the current Ordinance. It seems to me that a construction of the statutory provisions we have to consider which results in the principal debt being enforceable but the guarantee unenforceable could defeat the legislature's object of making the debt recoverable for the benefit of the shareholders depositors of a bank.

54. Before stating my conclusions, I wish to say a little about the effect of the expression "on the entering into of any contract" which occurs in s.129(1) of the current Ordinance. I express the view that it would be far too restrictive and grudging an interpretation of s.129(1) to read it to have the effect that a loan which was perfectly lawful when it was made, but which was unlawfully allowed to remain outstanding in terms of s.23(1) of the repealed Ordinance (because, for example, the paid up capital and reserves of the bank were suddenly diminished) will not be recoverable by reason only of the fact that the contravention of the statutory prohibition did not occur at the time the contract of loan was made. This would be an astonishing consequence and, again, give an undeserved windfall to a borrower.

55. In my judgment, to construe s.129(1) in that way would be to defeat its manifest purpose. When that section is interpreted in the manner required of the Court by the ordinary rules of construction given emphasis by s.19 of the Interpretation and General Clauses Ordinance, it is evident that the legislature has effectively ordained that all contracts involving loans etc. shall be enforceable whether the contract contravened s.23(1) of the repealed Ordinance (or s.81 of the current Ordinance) when it was formed or at any time during its currency

56. I have to say, that unless constrained by unambiguous statutory language, or by direct authority which binds this Court, I find it impossible to hold that where a principal debt is expressly made enforceable despite a contravention of statutory provisions, a guarantee, which is not otherwise prohibited, is not also enforceable.

57. I have not dealt with all the interesting submissions so forcefully and attractively advanced to us by Mr. Thomas. I have only addressed the authorities and matters which seem to me to be decisive. I am left in no doubt as to the way the preliminary points of law (which, as we have seen, are in question form) should be answered. Having regard to the date when this action was instituted, I would answer "yes" to question (i) and "no" to question (ii). I would also answer "yes" to question (iii). Despite the helpful arguments addressed to us on question (iv), I regard it as academic in the sense that it does not arise in the light of the answers I have given to the earlier three questions. I therefore respectfully refrain from answering it.

58. For the reasons I have attempted to give (save for restoring the preliminary points of law to the from in Sears, J.'s order) I would dismiss the appeal and uphold Godfrey, J.'s consequential orders because, on the pleaded case, apart from issues relating to quantum, the decision on the questions of law substantially disposes of the controversy between the parties.

Hunter, JA:

59. I have found this a very difficult appeal because in my judgment it raises in acute form the location of the dividing line between construction and legislation; and the extent to which a court can repair deficiencies in legislation expressly intended to have retrospective effect. The problem arises in relation to both the crucial questions for decision. These questions can I think be stated thus:

(A) Notwithstanding the absence of words expressly making it retrospective, can the amendment to s 129 (1) of the 1986 Ordinance, effected by s 27 of the 1987 Ordinance, be regarded as effective to amend s 129(1) retrospectively to 1st September 1986, the date of commencement of that part of the 1986 Ordinance?

(2) Can s 129(1) of the 1986 Ordinance be read as if instead of the words:

"The contravention of any prohibition ....on the entering into of any contract shall not render that contract unenforceable".

The section read :

"The contravention of any prohibition ..... shall not render any contract unenforceable"?

60. It is necessary at the outset to identify the relevant principles. In a field where judicial pronouncements have not always been entirely consistent, I have looked for those which seem to me consistent with the purposive approach required by s 19 of the Interpretation and General Clauses Ordinance (Cap 1). The first two principles can I think conveniently be taken from the judgment of Lindley LJ in Lauri v Renad - [1892] 3 Ch 402, 421 namely:

(1) "It is a fundamental rule of English law that no statute shall be construed so as retrospective operation, unless its language is such as plainly to require such a construction.

(2) And the same rule involves another and subordinate rule, to the effect that a statute is not to be construed so as to have a greater retrospective operation than its language renders necessary". (My emphasis)

To the same effect in Reid v Reid (1886) 31 Ch D 402, 408 Bowen LJ said:

"You ought not to give a larger retrospective power to a section, even in an Act which is to some extent intended to be retrospective, than

you can plainly see the legislature meant". (My emphasis)

(3) "It is a genera rule when the legislature alters the rights of parties by taking away or conferring any right of action, its enactments, unless in express terms they apply to pending actions, do not affect them "Re Joseph Suche & Co Ltd (1875) 1 Ch D 48, per Jessel MR 50.

(4) In relation to the court's power to fill gaps in legislation having prospective effect, one finds:

(a) In Magor and St Mellons Rural District Council v Newport Corporation [1952] AC 189 this per Lord Morton of Henryton at p 192:

"Insofar as the intention of Parliament,... is revealed in Acts of Parliament or orders, either by the language used or by necessary implication, the courts should, of course, carry these intentions out; but it is not the function of any judge to fill in what he conceives to be the gaps in an Act of parliament". In Lord Simond's speech the same thought is somewhat more strongly expressed.

(b) In Jones v Wrotham park Estates Limited [1980] AC 74, one finds, in addition to the passage cited by my lord the Vice-president from the speech of Lord diplock, this in the speech of Lord Salmon :

"It is well settled, however, that the courts have no power to fill in any gap in an Act, even if satisfied that, had the legislature been aware of the gap, it would have filled it in: Johnson v Morton [1978] 3 WLR 538, 543".

(5) "The general rule is 'not to import into statutes words which are not to be found there' and there are particular purposes for which express language is absolutely indispensable" per Craies on Statute Law 7th edition p 109. At p 112 the same author says: "Express and unambiguous language appears to be absolutely indispensable in statutes passed for the following purposes: ....conferring or taking away legal rights whether public or private; excepting from the operation of or altering clearly established principles of law"

 

61. It seems to me that if the limits of the court's power to fill gaps in relation to prospective legislation is as stated in propositions (4) and (5) above, it is difficult to conclude that anything much less than express and unamoiguous language would suffice for retrospective legislation or satisfy the principle stated by Lindley LJ and Bowen LJ.

62. With that preamble I turn to consider the two questions I have formulated.

(A) I have been unable to derive any assistance in this context from any hypothetical construction of the 1986 version of s 129. I find it impossible to exclude later knowledge from any such consideration, which deprives it of meaning. The legislature having acted in 1987, the only question to my mind is whether that amendment is to be afforded retrospective effect.

63. This question can be reformulated with direct reference to the facts of this case. The chronology is significant and is:

64. 01.09.1986 Commencement of all relevant parts of 1986 Ordinance.

65. 20.09.1986 Demand made under all guarantees.

66. 09.10.1986 Writ and Statement of Claim.

67. 20.01.1987 Defence raising s 23 illegality.

68. 30.10.1987 Commencement of 1987 Ordinance.

69. 27.06.1988 Reply pleading ss 129 of the 1986 Ordinance and s 27 of the 1987 Ordinance.

If the legislature in 1987 had directed its mind to existing litigation, and in particular to this case, what answer would it have give to the question what impact is s 27 to have upon such litigation?

70. I think there are three possible answers or combination of answers which a hypothetical reasonable legislator might have given to this question namely:

(1) S 129 is obviously and embarrassingly incomplete. It was always intended to have retrospective effect back to 1st April 1976, which means that it had to apply not simply to contraventions of the 1986 ordinance but to contraventions of the repealed ordinances. The most that this defendant can say is that he may have been misled by our mistake. Our intention was that this section should operate from 1st September 1986 the material commencement date of 1986 Ordinance. So making the 1987 addition or clarification retrospective will not deprive this defendant of any defence we intended him to have. Had both error and express intent to correct been acknowledged the case might be indistinguishable from Attorney General v Poujett (1816) 2 Price 381.

(2) S 129 as it stands is very embarrassing, but our mistake does not entitle us to depart from the principle that, we must not by our legislation affect existing proceedings, which principle is expressly stated in s 129(2) and its predecessor s 41B. The choice is between making the new liberty to sue which the perfected s 129 gives to a bank effective from 30th October 1987, so that any bank which had started proceedings before that could readily discontinue in the face of our amendment and start again; or in effect by making the amendment retrospective to 1st September 1986 to expunge an existing defence. We must stick to principle and adopt the former course.

(3) This is only a variant on answer (2) to explain silence. There is no need to draw attention to the original mistake or deal with the point of retrospectivity expressly. If nothing is said s 27 would only take effect from the commencement of the 1987 Ordinance (ie 30th October). When this is read into s 129, that, as amended, will only take effect from the latter date.

71. S 129 in both, its original and more particularly in its ultimate form, relieves the bank from the consequences of any breaches of s 23 and affords it a new unqualified cause of action, at least as against a principal debtor. By contrast a defendant loses not an accrued right but a defence. I therefore think that the section has to be regarded as substantive rather than procedural. Prima facie per Jessel MR, express words were needed to make the 1987 amendment retrospective, and these are absent.

72. Further I can see considerable force in both the possible answers suggested above under (1) and (2). The legislature's silence leaves me in a state of complete uncertainty as to which of these views either in fact prevailed or would have prevailed had the question been raised. I can therefore see no necessary implication that s 27 of the 1987 Ordinance must be given retrospective effect.

    (B) This problem can I think be summarised thus:

(1) Both ss 41B and 129 (1) only addressed primary obligations of principal debtors as at the time of "the entering into of any contract". In relation to s 129 this may have been because attention was focused upon the decision in Whitehall Finance Limited v Win and Fair Securities Co Ltd. Civil Appeal No 187 of 1984 (Unreported), and the limitations there revealed of a section in the terms of a section in the terms of s 41B. Neither section addressed secondary ob1igatioas at all.

(2) The prohibition in s 23, upon banks is in the terms: "shall not grant or permit to remain outstanding". It is the second limb which is calculated to be a dominant feature in the consideration for any guarantee. Indeed it could be the only consideration. In the light of proviso (aa) to s 23(1), it is not possible to say that guarantees given to banks were not in contemplation. But the section contains no prohibition expressly directed to the giving or taking of guarantees. What is expressly prohibited and made illegal is the conduct upon which the guarantee is likely to be based.

(3) It is common ground that the express terms of s 129 are not apt to cover guarantees or to grant any relief in relation to guarantees or to grant any relief in relation to guarantees. Illegality after the contract is entered into by the principal debtor, and any illegality arising under the second limb in s 23 is simply ignored. The question is whether this omission can be filled retrospectively by necessary implication.

73. It must be recognised at the outset that this can only be achieved by re-writing s 129(1), hence the terms of my second question. The new wording could take various forms, and the only merit of mine is that it may do least violence to the original language. But upon any view it constitutes major surgery. Two express limitation have to be removed and changes made: from primary debtor to all liabilities primary and secondary: and from the time of the initial breach to continuing breaches at any time.

74. This is sought to be achieved in two ways which I regard as variations of the same theme. The direct route is by necessary implication from the terms of s 129(1) as they stand. If the primary debts are recoverable, the argument is that no objection can possibly be sustained to the enforcement of guarantees. The indirect route, preferred by Mr Mills-Owens QC, relied upon the public policy said to emerge from the amended Ordinance. When s 129 is read into the Ordinance and its predecessors back to 1976, it can be seen, the argument goes, as a matter of construction, that s 23 creates no obstacle to the enforcement of principal debts. Notwithstanding the continuing express prohibition, contracts are not, and are deemed never to have been void, but are, and always have been enforceable. Even though the consideration for a guarantee may still be tainted with illegality under the second limb in s 23, it is a matter of public policy whether that should impede enforcement, and there is now no policy which supports that conclusion.

75. If this court were free to do what it thinks the legislature would have brought about if it had considered secondary liabilities, there would be great force in these arguments. It is easy to argue that a glaring omission exists in s 129(1). It is most unlikely that the legislature consciously intended to draw a distinction between the granting of facilities and permitting them to remain outstanding, even in relation to primary debtors. It is equally unlikely that the legislature in 1986 intended to draw a line between primary debtors and guarantors, making contracts enforceable against the former and not the latter. In short it is easy for the court to say what, with hindsight, the legislature, if it was being wholly consistent, ought to have done, and to re-write the section with the view to bringing it about. This might well be regarded as sensible or desirable result, but for my part I see two grave obstacles to its achievement as a matter of construction in the circumstances of this case.

76. First in my view this would amount to legislation not construction. The court's position is not dissimilar to that in which it was in Whitehall Finance. I think that the judgments in that case, and particularly that of Sir Alan Huggins VP, show that the court was tempted, despite the express statutory prohibition, to follow the dicta of Devlin J in St John Shipping Corporation v Joseph Rank Limited [1957] 1 QB 267, 288 and conclude that the legislature could not have intended to affect civil remedies. But s 24C(2) in the then Deposit-taking Companies Ordinance (identical to s 41B) excluded that approach. The court could not speculate about a matter upon which the legislature had unambiguously expressed its actual intention in this section.

77. Mr Mills-Owns submits that the legislative intention of s 129 was to free the court from the "strait-jacket" of s 41B. This is only partly true. What the legislature has done is to substitute one "strait-jacket" for another. It has not made it clear, in the words of Mr Mills-Owens submission, that "all contracts should be fully enforced", but only those expressly referred to. In one sense speculation may be easier here than it was in Whitehall Finance. There is no express prohibition directed to guarantees; and s 129 as it stands shows a major shift in policy. But I do not believe that under the guise of construction this enables the court to re-write the relief expressly granted, in what it regards as more sensible or appropriate terms.

78. Secondly, if I have taken an unduly restricted view of the court's powers above, so that this would be an exercise open to a court construing prospective legislation, I would not have been persuaded that a court could so construe a section having retrospective effect.

With diffidence and regret I would answer the questions posed in the Order of 24th October 1988:

(1) Yes, in actions started after 30th October 1987.

(2) Yes.

(3) No.

(4) No. I think that the 1986 ordinance must be construed as a whole. I am unable to accept an argument which seeks to separate s 129 from s 149, and produce a conflict between the two.

Macdougall, J.A.

79. Like Hunter J.A. I have found this a difficult appeal. It is not always easy to determine the point at which the court's legitimate role of construction ends and beyond which it usurps the function of the legislature by seeking in effect to legislate.

80. While it is the duty of a court to carry out the intention of the legislature as is revealed in any particular Ordinance under consideration, it is not its function to fill in what it conceives to be gaps. But the intention of the legislature may be deduced either by the language used or by necessary implication. Indeed, the courts of Hong Kong are enjoined by s.19 of the Interpretation and General Clauses Ordinance Cap.1 to give "such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Ordinance, according to its true intent, meaning and spirit". The section is of general application. It applies, to both prospective and retrospective legislation and cannot be ignored.

81. It is common, ground that sec. 129 of the new Ordinance of 1986 as it stood before the 1987 amendment was defective. However, since subsection (2) deemed that subsection (1) was to have effect from 1 April 1976, it is plain that the legislature intended that, subject to one restriction, the section was to have retrospective effect. Unfortunately, as a consequence of a drafting blunder of omission in subsection (1), subsection (2) would have been rendered nugatory unless the blunder was rectified by a court or the legislature. It was clearly impossible for any contract entered into before the date of the commencement of the new Ordinance to contravene a prohibition contained in that Ordinance. To anyone who read s.129 at the time it was enacted in 1986, it must have been plain that what the legislature had in mind in this regard were contracts that had contravened a prohibition in the Banking Ordinance 1964 or the Deposit-taking Ordinance 1976, both of which were repealed by the new Ordinance. By the amendment of 1987 the legislature clearly showed that this was so.

82. In my view the legislature intended by necessary implication that the amendment was to have effect from the date of the enactment of the 1986 Ordinance, and not from they date of commencement of the amending Ordinance. Since therefore the legal proceedings in respect of the guarantees with which this case is concerned were not commenced until after l Sept. 1986, the date of commencement of the new Ordinance, the restriction on retrospectivity in s.129 does not impinge upon them.

83. Had the court been called on to interpret sec. 129 before the blunder had been detected and amended, I consider that it would have been its duty to apply a construction which rectified the drafting error. As Bennion observes in para. 142 of his work entitled Statutory Interpretation: "It is presumed that the legislator intends the court to apply a construction which rectifies any error in the drafting of the enactment, where this is required to give effect to the legislator's intention". In my view, not only was the drafting error in s.129 manifest, but it was plain what the legislature intended and what words had to be inserted in the section to give effect to that intention.

84. To argue that the retrospective effect of section 129 took effect from the date of the 1987 amendment is to contend that the amendment, in seeking to rectify the drafting error, had the effect of postponing the date of commencement of retrospective effect on contraventions of any prohibition in the Ordinances repealed by the 1966 Ordinance, to a date subsequent to that from which the court, had it been rquired to rectify the same error, would have determined that the section had that effect. I do not think this can be so.

85. But it is then said that s.129 (1) is directed solely to the primary obligations of principal debtors, and is silent as to secondary obligations. S.23 did not expressly prohibit the giving or taking of guarantees, but made illegal certain transactions on which guarantees might be founded.

86. If, however, it is accepted that sec. 129 renders enforceable contracts that were previously regarded as unenforceable because the relevant advance, loan or credit facility was prohibited by s.23, then any public policy that might earlier have prevented the enforcement of a guarantee supporting the grant of that advance no longer exists.

87. I think it is inconceivable that in enacting sec. 129 the legislature intended to distinguish between primary debtors and guarantors so as to make contracts enforceable against the one and not the other. Such a construction would produce a wholly unjust and illogical result. Moreover, it would operate so as to defeat the legislature's manifest object of making the advance, loan or credit facility recoverable for the benefit of the innocent shareholders and depositors of the bank. In this connexion I think it pertinent to observe that the penal provisions of s.63 for breaches of s.23 applied only to every director and manager of the bank which committed the breach.

88. I find myself led to the same conclusions as those reached by my Lord the Vice-President. I agree with the views he has expressed and would answer the questions posed in the same way he has done

Fuad, V.-P.:

89. In handing down these judgments dismissing the appeal by a majority, we make an order nisi that the appellant shall pay the respondent's costs.