GRANDWIN CO INC v. LUIS CHANG SOH

1989, No. A4290

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H E A D N O T E

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A prohibition order made under order 44A of the Rules of the Supreme Court was discharged on the grounds that the defendant had a substantial defence to the plaintiff's claim on the grounds that the interest charged was excessive under Section 24 of the Money Lenders Ordinance. The exception provided by Section 24(5)(a) did not apply as it only relates to a loan made to a company that has a paid-up share capital of not less than HK$l million or an equivalent amount in any other approved currency.

1989, No. A4290

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. I have before me an application by the defendant to discharge a prohibition order granted by Duffy J. on 4th August 1989 on the grounds that he has a substantial defence to the plaintiff's claim. On that date the defendant was prohibited from leaving Hong Kong until he has paid or provided security for payment of the plaintiff's claim of HK$4.7 million plus interest and costs.

2. The facts reveal that the plaintiff, a company incorporated in Liberia lent to S. Zhong Shan International Investments Company Limited (SZS), a company incorporated in Hong Kong, the sum of HK$4.7 million on 22nd December 1988. The defendant on behalf of SZS made an oral agreement with Mr Fok Chun Wah who acted for the plaintiff, that SZS would repay the principal together with interest amounting to $300,000 on or before 21st January 1989. However, on or about that date, by a further oral agreement between Mr Fok and the defendant, payment was deferred until 21st March with interest to accrue at $300,000 per month. No payment was made pursuant to that agreement, but on 22nd April 1989, the defendant agreed, in consideration of the plaintiff granting further time, to repay the sum advanced with interest if SZS should default in payment. SZS having defaulted in payment, a demand was then made to the defendant on 2nd August 1989 which has not been complied with.

3. The defendant seeks to discharge the order of prohibition under 0.44A, r. 4(3)(b)(i) which provides that if the court is satisfied that there is a substantial defence to the plaintiff's claim, the court shall discharge the order. The defence relied upon is that the interest charged is excessive under the provisions of section 24 of the Money Lenders Ordinance thereby rendering the agreement or security for the loan unenforceable. Section 24(1) and (2) provides :-

"24. (1) Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 60 per cent per annum commits an offence.

    (2) No agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds the rate specified in subsection (1)."

Interest of $300,000 per month amounts to a rate of 76.59578 per annum so that it is well in excess of the statutory limit.

4. One exception in this case to the rate of interest is provided under section 24 (5) (a) which relates to a loan specified in paragraph 12 in Part 2 of Schedule I of the ordinance made to a company that has a paid-up share capital of not less than HK$1 million or an equivalent amount in any other approved currency. The paid-up share capital of SZS is HK$49,950,000.

5. Mr Thomas, counsel for the defendant, contended that the subsection is restricted to loans to a company with the required paid-up share capital and does not extend to related transactions or subordinate transactions between the lender and a third party by way of guarantee. This argument is reinforced by the wide terms in which subsection (2) is expressed, whereas subsection (5)(a) on the contrary is very narrow, merely referring to a loan as specified in the Schedule. The independent promise by the defendant to pay does not, therefore, deprive him of his rights under the ordinance.

6. Mr Faulkner, counsel for the plaintiff, argued that the absence of words such as "guarantee", "security" or interest from subsection (5)(a) does not detract from the fact that the guarantee is fundamental to the basis of the claim which is in respect of a loan to a company.

7. Having construed the legislation, I do not accept that interpretation which I consider would defeat the intention of the legislature. Indeed as was submitted by Mr Thomas the legislation could be rendered nugatory if Mr Faulkner is right for a tame company with the necessary paid-up share capital could always be interposed as the borrower with a guarantee given by an individual who is recognised as the actual beneficiary and regarded by the parties as primarily liable under the agreement. The words of the section are, in my opinion, quite clear. In order to come within the exception, the loan must be made to a specified company. The guarantee given by the defendant for the loan does not therefore lose the protection conferred by section 24(2) with the result that it is unenforceable. Even if I had expressed any doubt as to the true meaning of the legislation. I would have held that the defendant had established that he has a substantial defence to the plaintiff's claim. Accordingly, the prohibition order granted by J. will be discharged.