ASG FINANCE LTD v. FAN CHUN SHING DAVID

HCA 3130/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3130 OF 2002

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J U D G M E N T

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1. This is the Plaintiff's appeal from the Order of Master Au Yeung giving the Defendant unconditional leave to defend the present action.

2. In view of the conclusion that I have reached on this appeal, I will be as brief as possible.

3. The Plaintiff, a money-lender, sues the Defendant for recovery of outstanding indebtedness. The Defendant is a practising solicitor. He is now the senior partner of a law firm. His firm used to act as the solicitors for the group of companies to which the Plaintiff belongs. At the material time, the Defendant was a consultant in his firm. Moreover, at one stage, the Defendant was a director of the Plaintiff, as well as a director of the Plaintiff's holding company (Asia Securities Global Limited or simply "ASG") and ASG Brokerage Limited ("ASG Brokerage"), a stock-broking company within the group.

4. By a client's agreement dated 10 May 1995 made between the Defendant, the Plaintiff and ASG Brokerage, a client's agreement dated 10 May 1995 between the Defendant and ASG Brokerage, and a facility letter dated 15 May 1995 issued by the Plaintiff to and accepted by the Defendant, the Plaintiff agreed to provide credit facilities to the Defendant to finance the Defendant's dealings in shares and other securities through the stock-broking services of ASG Brokerage. Two share trading accounts were involved. According to the Plaintiff, there was incurred indebtedness under each of the accounts, which was financed by the Plaintiff. On 20 July 1999, a deed of acknowledgement and consolidation of debts ("the deed") was entered into between the Plaintiff, the Defendant and ASG Assets Management Limited (another company within the Plaintiff's group), whereby the Defendant's debts under the two accounts were combined and consolidated. According to the deed, the Defendant agreed and acknowledged that he was indebted to the Plaintiff in the total principal sum of $14,597,202.88. To cut a long story short, the Plaintiff now sues on the deed to recover the outstanding indebtedness.

5. In opposition to the Plaintiff's application for summary judgment, the Defendant raises a twofold defence. First, he questions the quantum of the alleged indebtedness. He alleges that his two accounts have been "intermeddled with" by someone. In other words, "fraud" has been practised. However, he is unable to condescend on particulars, pending discovery of documents. Secondly, he takes what I will call a money-lender's point.

6. In respect of the alleged intermeddling, I would simply say that on the material before me, particularly the contemporaneous documents, it is difficult if not impossible to believe the Defendant's bare assertion. It is difficult to square the Defendant's assertion with the numerous statements of account sent to the Defendant on a regular basis, the various correspondences between the parties, the deed, the partial repayments made by the Defendant, the draft deed of settlement, and the general lack of response or complaints from the Defendant regarding the Plaintiff's repeated demands for repayment and his alleged suspicion of fraud or intermeddling with his accounts throughout the years. Whilst the Defendant seeks to suggest that he has not received some of the statements of account, it should be noted that he does not dispute the correctness of the addresses set out in the statements of account, to which they were sent. Nor has he explained whether he has noticed anything irregular with those statements of account that he did receive, and what his response was. I also find his suggestion that the amounts of indebtedness now appearing in the deed were left blank when he signed and sealed the deed rather disingenuous, particularly given his educational and professional background, as well as his relationship with the Plaintiff's group of companies.

7. Of course, I bear in mind that I am only here dealing with an Order 14 appeal. The test applicable is whether the Defendant's assertions of fact are believable, as opposed to whether they should be believed, which is a matter for the trial judge if there should be a trial. However, the Court, even at this stage, is entitled to look at the contemporaneous documents and conduct in order to see whether what has been alleged by the Defendant is believable or not.

8. If this had been the only line of defence or purported defence put forward by the Defendant in opposition to the present application for summary judgment (or in opposition to this appeal), I would have very much inclined to conclude that there is no triable issue, or put at the lowest, that the defence is so shadowy that some conditions should be imposed before allowing it to proceed further.

9. However, this is not the only line of defence or purported defence of the Defendant. The Defendant also raises a money-lender's point. It is common ground that at the time the facility letter was issued by the Plaintiff to the Defendant, the Plaintiff, being a money-lender, was obliged to observe, amongst other things, the regulatory provisions in section 18 of the Money Lenders Ordinance (Cap. 163), which reads:

"18. Form of agreement

(1) No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be enforceable unless-

(a)	within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and
(b)	there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,

and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.

(2) The note or memorandum shall contain all the terms of the agreement and in particular shall set out -

(a)	the name and address of the money lender;
(b)	the name and address of the borrower;
(c)	the name and address of the surety, if any;
(d)	the amount of the principal of the loan in words and figures;
(e)	the date of the making of the agreement;
(f)	the date of the making of the loan;
(g)	the terms of repayment of the loan;
(h)	the form of security for the loan, if any;
(i)	the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2; and (Amended 69 of 1988 s. 15)
(j)	a declaration as to the place of negotiation and completion of the agreement for the loan.

(3) Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable. (Amended 69 of 1988 s. 15)"

10. The Plaintiff obtained a limited exemption from section 18 on 7 October 1996. The exemption only applied in connection with money lending transactions between the Plaintiff and its clients relating to the trading by its clients in securities listed in the local stock exchange, where the trading was carried out through ASG Brokerage.

11. On 8 May 1998, the Plaintiff obtained a general exemption from, amongst other things, section 18 of the Ordinance.

12. Mr Scott SC, appearing for the Plaintiff, concedes that at the time when the facility letter was issued by the Plaintiff to the Defendant, none of the above exemptions applied. He accepts that section 18 applies to the original facility agreement. He argues that the facility letter itself constitutes the requisite note or memorandum. He concedes that there was "superficial" non-compliance with the requirements under section 18, such as the setting out of the default (compounded) interest rate in the note or memorandum. Yet he maintains that his client's claim in the present action is not affected and summary judgment should be given.

13. First, Mr Scott argues that the Plaintiff sues on the deed, which was executed on 20 July 1999, i.e. after the Plaintiff has obtained a general exemption. His client is not suing on the lending agreement that was embodied in or evidenced by the facility letter issued back in 1995 when there was no exemption from the provisions in section 18. Any enforcement problem due to non-compliance with section 18 would only affect the original agreement so embodied in or evidenced by the facility letter. But since the Plaintiff is suing on the deed, no such enforcement problem arises in the present case.

14. Secondly, Mr Scott argues that in any event, section 18(3) gives the Court a discretion to enforce the agreement for repayment notwithstanding non-compliance with the provisions in section 18, and he argues that on the material before the Court, there can be no doubt that the discretion should be exercised in favour of the Plaintiff in enforcing repayment of the outstanding indebtedness. At the very least, repayment of the outstanding principal plus simple interest should be allowed.

15. In relation to the first point, I am of the view that it is reasonably arguable that section 18(1) may be wide enough to directly cover the deed. One possible argument is that the deed is a "security" within the meaning of section 18(1). There could be some other possible arguments as well.

16. Furthermore, in my judgment, it is arguable that direct application of section 18(1) to the deed aside, the deed may be indirectly affected by section 18(1) because the debts which the deed sought to combine and consolidate were themselves affected by section 18(1), the validity of which arguably formed the underlying premise of the deed in the first place.

17. In relation to Mr Scott's second point on discretion, I am prepared to accept that there is no rule of law that the Court cannot, at the Order 14 stage, deal with the question of discretion under section 18(3), or put another way, consider whether it is beyond argument that the discretion can only be properly exercised in one way, and instead must in all cases defer the question to a full trial: see Celestial (International) Securities & Investment Limited v William Henry Woo, HCA 9659/2000, Lam DJ (4 December 2001) paras 30 to 37; Re William Henry Woo, HCB 276/2002, Kwan J (31 May 2002) paras 15 and 16; but c.f. Cheung Chow v Cheung Ng Sheong Steven, Civil Appeal No. 119 of 1993 (24 November 1993). I am prepared to accept that in an appropriate case, the Court may, at the hearing of an Order 14 application, conclude on the material before it, that the discretion under the money lending legislation can only be properly exercised in a particular manner, so much so that any contention to the contrary is unarguable, and deal with the application for summary judgment accordingly.

18. For present purposes, I am also prepared to accept that the facility letter is sufficient to constitute the note or memorandum required by section 18 of the Ordinance.

19. However, each case depends on its own facts. Moreover, as Bokhary JA (as he then was) observed in Cheung Chow (on pages 7 to 8),

"It is at least reasonably arguable that, as those learned judges held at first instance, the courts should be slow to relieve money lenders 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 money lenders 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 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.

If it be correct for the courts to approach their discretion in the way in which it was approached in the two first instance decisions which I have mentioned - and I do not think that we can rule that out at this stage - then it would be important to have a full picture of the activities in general of the money lender in question. That picture is not before us. Overall, no court can say with reasonable confidence at this stage that it has a clear view of all the circumstances which fall to be considered in the exercise of the discretion here in question."

20. Mr Chan, appearing for the Defendant, argues that one is not concerned with "superficial" non-compliance with section 18 here. He draws my attention to paragraph 6 of the first affirmation of Tran Dinh, a director of ASG - the holding company of the Plaintiff, which reads:

"6. In or about early 1995, the Defendant expressly mentioned to ASG that he intended to borrow money from ASG for his personal and/or business use. His idea was to have credit facilities for short-term borrowing from ASG and to repay the borrowed money in a few months. On the basis of the close relationship and mutual trust, ASG through the Plaintiff agreed to provide such facilities with the Defendant without requiring him to come up with any collateral as security. However, as the case was special, it was agreed between the Plaintiff and the Defendant that the interest rate applicable should be 6% per annum above prime, while the prevailing interest rate at that time for other customers of the Plaintiff was 3% per annum above prime."

21. Mr Chan points out with force that the facility letter, in so far as it constituted the note or memorandum, was wholly misleading and incorrect in relation to the all important question of interest rate, in that it stated the interest rate to be 3.5% per annum above prime, whereas according to Mr Tran, the interest rate was 6% above prime. The facility letter was "deliberately misleading". (Mr Scott has no instructions on whether interest was charged in the statements of account at prime plus 3.5% or prime plus 6%.)

22. Moreover, Mr Chan also points out that according to the facility letter, the facility was "for financing of securities purchased by the [Defendant] through ASG Brokerage Limited". This is totally contradicted by what was said in paragraph 6 of Mr Tran's first affirmation extracted above. Whilst of itself it does not, unlike the interest point, involve any direct non-compliance with section 18 of the Ordinance, Mr Chan argues that it throws light on the (allegedly) questionable mode of operation adopted by the Plaintiff in lending out monies, which is relevant to the question of discretion.

23. The numerous statements of account also bear evidence to the fact that the facility granted by the Plaintiff to the Defendant was very often used not for share trading activities at all.

24. Mr Chan also draws my attention to the peculiar feature of the Defendant being required to deposit "PDCs" - post-dated cheques, with the Plaintiff, which curiously were treated by the Plaintiff as equivalent to stocks in hand in the statements of account.

25. Furthermore, whilst the facility letter stated that the maximum liability outstanding under the facility letter should not exceed $5 million, the statements of account show that the credit limits varied from time to time. At one stage, the outstanding limit was allowed to exceed $58 million, i.e. more than 10 times the stated maximum liability. Here, section 18(2)(d) is relevant because it requires the note or memorandum to set out the amount of the principal of the loan. Whilst from 1996 to 1998, the Plaintiff enjoyed a limited exemption regarding its money lending activities, they were restricted to those involving share-trading transactions done through ASG Brokerage. Yet as has been mentioned, many of the borrowing transactions of the Defendant did not, on the face of the record, concern share-trading at all.

26. Mr Chan observes that although all these points were raised before the Master below who gave the Defendant unconditional leave to defend, the Plaintiff has not taken the opportunity of the present appeal to file evidence in reply to these matters.

27. Mr Chan therefore says that one is not concerned with mere technical or superficial breaches of section 18 here. Nor can one safely say that all relevant material or circumstances have been presented before the Court in order to enable the Court to consider how the discretion under section 18(3) should be exercised, or put another way to tell whether the discretion under section 18(3) can only be properly exercised in one way.

28. I am with Mr Chan. The question of discretion under the money lending legislation has recently been considered by the Court of Final Appeal in Emperor Finance Ltd v La Belle Fashions Ltd [2003] 3 HKLRD 995. Whilst ultimately the question is whether it would be "inequitable" not to enforce the lending agreement, I cannot conclude, at this stage, that having a full picture of the activities in general of the Plaintiff would be wholly irrelevant or unimportant to considering how the discretion under section 18(3) should be exercised. And certainly, I do not think I have the full picture before me. I cannot say with reasonable confidence at this stage that I have a clear view of all the circumstances which fall or may arguably fall to be considered in the exercise of the discretion involved.

29. Mr Scott argues that the Defendant has not been able to point to any prejudice or serious prejudice that may have flown from the matters raised by Mr Chan. That may be so. But prejudice would only be one of the many considerations, albeit an important one, that a court may take into account in considering how to exercise the discretion in question.

30. At this stage, without knowing more about the activities of the Plaintiff in general and how it operated the facility account of the Defendant in the present case in particular, I am not confident that I have all the relevant facts and circumstances before me in order to decide whether the discretion in question can only be properly exercised in one direction, or the extent to which the discretion may be exercised in favour of the Plaintiff.

31. For the sake of completeness, I should mention that Mr Scott has not argued that the indebtedness should be split into post-8 May 1998 indebtedness (i.e. the date of the general exemption) and pre-8 May 1998 indebtedness, so as to "rescue" the post-8 May 1998 indebtedness from the money-lender defence, for the purpose of the present Order 14 appeal.

32. In any event, in my judgment, it is at least arguable that no such severance can be effected. For the purpose of disposing of the present Order 14 appeal, that would be quite sufficient an answer.

33. For all these reasons, I am of the view that the learned Master below has correctly exercised her discretion in granting unconditional leave to defend.

34. The appeal is therefore dismissed. Costs should follow the event: I order that the costs of this appeal be paid by the Plaintiff to the Defendant; such costs are to be taxed if not agreed.

35. I would like to thank counsel for their helpful assistance.