WHITEHALL FINANCE LTD v. WIN & FAIR SECURITIES CO LTD

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JUDGMENT

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Preliminary

1. By an agreement dated the 9th May 1981 the Plaintiff agreed to make advances to the Defendant for the purchase of securities. Pursuant to it shares were purchased from time to time on the local market and a running account was kept between the parties from the 22nd of May 1981, in three separate accounts in the Plaintiff's records, Nos. 944, 945 and 946. On the 25th of May amounts were advanced on each of these accounts totalling $8,632,466.00. On the 8th of March 1982 accounts Not. 945 and 946 were closed and the only account kept after that was 944. The highest amount ever lent by the Plaintiff to the Defendant was $9,683,987.00, the balance due on the 22nd of July 1981. There is nothing in the written agreement imposing any limit on the amount to be borrowed by the Defendant from the Plaintiff; but on the 1st of December 1982, by letter; the Plaintiff informed the Defendant that it was fixing its credit facility at the amount then outstanding, HK$4,892,311.00. Subsequently by the sale of securities that amount was reduced and on the 4th of January 1983, the last relevant date, the amount outstanding was $4,449,525.00. The Plaintiff company went into liquidation on the 28th of that month.

2. The basis on which funds would be made available was that the Plaintiff would lend a certain percentage on the value of shares purchase and there was on the accounts a "position ratio" which was the percentage lent in relation to the then current market value of the securities. As a general rule this should have been about 60% and initially this was complied with. However later as the value of Hong Kong shares dropped rapidly this ratio increased substantially until eventually the amount lent was considerably more than the value of the shares.

3. At the time the arrangement was entered into the Defendant in fact executed two documents, one a general loan agreement and the other a memorandum of deposit. Pursuant to these documents the Defendant agreed that when funds were advanced from time to time by the Plaintiff for the purchase of securities, the share certificates would be deposited with the Plaintiff as security and the Defendant would pay interest on the balance owing from day to-day at a rata to be determined by the Plaintiff. Throughout the period under consideration that rate was 17%. The balance owing at any time was to be repayable inmediately on demand.

4. While there was nothing set out in the documents as to any limit on the amount to be lent at any one time, evidence was given by Mr. Woo Wing-fai, the managing director of the Defendant that at the time the agreement was entered into he was told by his counterpart in the Plaintiff company, Mr. David Lim, that the limit was $10.5 million. Mr. Lim has now gone to Taiwan and no evidence is available from him. The only documentary evidence of any limit of the amount to be made available by the Plaintiff to the Defendant is the letter of 1st of December 1982 fixing the limit at the amount then owing, $4,892,311.00.

The Defence

5. The Defendant in the action put the Plaintiff to strict proof that the amount claimed was in fact $4,449,525.00 and that no part of that had been repaid. However at the hearing this evidence was not challenged. The defence was entirely that of illegality in that the Plaintiff had contravened the provisions of Section 22 of the Deposit-taking Companies Ordinance. It had agreed to lend and had in fact made loans to the Defendant in excess of 25% of its paid-up canital and reserves, which that section prohibits. The agreement and the advances made under it being illegal, those advances were now irrecoverable. Section 22(1) reads as follows:-

"A depost-taking company shall not grant or permit to be outstanding

 

The Plaintiff's Case

6. Evidence was called by the Plaintiff from Mr. C.M. Maxin, Senior Insolvency Manager of Arthur Anderson & Co., Chartered Accountants. The liquidator of the Plaintiff, Mr. M.N. Johnson, is a partner of that firm. He produced the firm's accounts and stated that so far as he could see they were correct. This was not challenged. He said that according to these records the amount owing by the Defendant to the Plaintiff as at the 4th of January 1983 was $4,449,525.00 and that despite requests none of that sum had been paid.

7. The statement of the assets and liabilities of the Plaintiff company as at 31st of March 1981 contained a statement that the fully paid-up capital was $12 million. The share premium reserve was $1.537,600.00. The capital reserve was $12,229,950.00. This gives a total of $25,756,550.00. There is included in the statement of assets unpropriated profits of $5,612,328.00 and a provision for taxation of $230,000.00. These amounts however could be paid out by the company in the form of dividends at any time and I therefore do not consider that they come within the term "paid-up capital and reserves". I think that term must be confined to amounts which can't be paid out by the Directors in the form of dividends.

8. The Plaintiff's capital reserve is based on the re-valuation of a property which he owned. This property was purchased for $18,677,000.00. It was re-valued by professional valuers at $30,900,000.00. It consists of half a floor of the United Business Centre. While subsequent events have no doubt made this valuation unrealistic I have no reason to doubt that at the date of the valuation it was a reasonable estimate. In any event it is for the Defendant to show by evidence that this was not a correct value. There is no such evidence. The Defendant has however submitted that while the property may have been valued at that figure, by a notice of particulars of charge filed in the Companies Registry on the 17th of July 1981 the property was mortgaged to the Manufacturers Hanover Trust Co. Ltd. to secure general banking facilities to the extent of US$6 million. This is submitted therefore that the property had been mortgaged for the full extent of its value and it should not therefore come within the capital and reserves of the Plaintiff company. This, in my view, is not correct. Provided that it is so authorised by its Memorandum and Articles of Association, a company may mortgage any of its property and this does not operate as a reduction of capital. The monies obtained under such mortgage are not profits of the company and must not be paid out in the form of dividends. The proceeds of such mortgage remains capital. There is I think, nothing whatever in the papers before me to indicate that the proceeds of that mortgage have been dissipated in any illegal manner. I am therefore satisfied that the capital and reserves of the Plaintiff within the meaning of Section 25 of the Deposit-taking Companies Ordinance was the sum of $25,756,550.00.

9. I also am satisfied that the contract entered into between the Plaintiff and the Defendant did not at that time have any limit as to the amounts to be advanced by the Plaintiff to the Defendant. The conteract was for a running account and that at any time the Plaintiff could either freeze the account so that no further advances would be made or set any other limit on it. That was not done until the 1st of December 1982 when the limit was fixed at $4,892.400.00. I do not accept Mr. Woo's evidence as to an oral agreement limiting advances to $10.5 million. I did not find him to be a convincing witness.

The Law

10. It is the basic principle of illegality in regard to contracts that public policy requires that if a person enters into a contract which he knows is illegal ab initio or if it is such as must inevitably be carried out in an illegal manner, he should not benefit from that contract.

11. In this case, the Deposit-taking Companies Ordinance provides that no such company should lend more than 25% of its paid-up capital and reserves to any one person or company or group of companies. Subsection 8 of that section provides a criminal sanction for a breach of that provision. The pre-amble to the Ordinance state that it is:-

"to regulate the taking of money on deposit and to make provision for the protection of persons who deposit money.".

Clearly the Ordinance was designed to protect the interest of the public depositing money with a deposit-taking company and it would seem very much against their interest if monies, having been lent in excess of the statutory provision, should be irrecoverable. The Plaintiff relies on the decision in St, John Shipping Corporation v. Joseph Rank Ltd. [1957] 1 Q.B. 267. That was a contract for the carriage of grain from the United States to the United Kingdom. A claim for the payment of freight was defended on the ground that during the course of the voyage the vessel had been overloaded thereby contravening the Merchant Shipping (Safety and Loan Line Conventions) Act 1932. It was held that the principle that a right was unenforceable if it directly resulted from the crime of the person asserting it did not apply in that case as the Plaintiffs' right to freight from the Defendants was not a right which was brought into existence by their crime. At page 286, Devlin J. cites with approval dicta of Tenterden. C.J. in Wetherell v. Jones (1832) 3 B & Ad. 221:-

"Where a contract which a plaintiff seeks to enforce is expressly, or by implication, forbidden by the statute or common law, no court will lend its assistance to give it effect: and there are numerous cases in the books where an action on the contract has failed, because either the consideration for the promise or the act to be done was illegal, as being against the express provisions of the law, or contrary to justice, morality, and sound policy. But where the consideration and the matter to be performed are both legal, we are not aware that a plaintiff has ever been precluded from recovering by an infringement of law, not contemplated by the contract, in the performance of something to be done on his part.".

He goes on at 287 to say:-

"The fundamental question is whether the statute means to prohibit the contract. The statute is to be construed in the ordinary way; one must have regard to all relevant considerations and no single consideration, however important is conclusive.''.

Here, I am satisfied that there was never any intention to prohibit the contract which was entered into between the parties. It was a perfectly normal contract, very similar indeed to a overdraft contract which companies and individuals enter into with banks everyday. The manner of its performance may at a certain stage have been illegal, but even if on the 4th of January 1983 the amount owing by the Defendant to the Plaintiff had exceeded the 25% limit, I would have been satisfied that the amount was still recoverable. In Brougham v. Dwyer (1913) The Law Times, 505. Lush .J., when considering the effect of money lent by a building society under a contract which was ultra vires said:

That, it seems to me, is the position here. (See also Spector v. Ageda [1973] 1 Ch. 30. Waugh v. Morris Vol. VIII L.R. 202. Archibalds (Freightage) Ltd. v. S. Spranglett Ltd. (1961) C.A. 374.) .

12. I am moreover satisfied that the provisions of Section 24C.(2) of the Deposit taking Companies Ordinance does not alter the common law position. It reads as follows:-

"        The contravention of any prohibition in this Part on the entering into of any contract shall not sender that contract unenforceable against the deposit-taking company if that contract was entered into in the ordinary course of the business of that deposit-taking company and the person seeking to rely upon the contract had no knowledge of the contravention and may be enforced at the instance of the deposit taking company if the court is satisfied the company exercised all due diligence to avoid the contravention of the prohibition.".

The subsection is clear that it relates only to a contract which offends the Ordinance at the time it was made. It does not cover a contract which, while on the face of it perfectly proper, is carried out illegally. The station does not therefore assist the Defendant here even if the amount lent at the time the Plaintiff sought to enforce its rights exceeded the 25% ratio, and I am satisfied it does not.

Decision

13. There will be judgment for the Plaintiff in the sum of $4,449,525.05. The plaintiff is to have interest on that amount from the 4th of January 1983 till today at 14% (i.e. best lending rate plus 2%). The Plaintiff is also entitled to its costs. Counsel for the Plaintiff argued that they have been put to additional expenses in having to prove the amount owing by the Defendant. This was not admitted and the Plaintiff was put to strict proof both of the amount owing as at the 4th of January 1983 but that evidence was in fact not in any way challenged. There is some merit in that argument and the Plaintiff is entitled to its costs on that part of its defence on a common fund basis. So far as the rest of the argument was concerned, which occupied the greatest part of the time spent, there was a legal defence to this matter and there will be the normal order for costs to the Plaintiff.

14. I am indebted to both Counsel for the clarity with which this matter was presented. The defence was one which obviously no Court would maintain unless compelled to do so and Counsel for the Defendant had a difficult task. Mr. Yu did so with considerable skill.