BROTHER'S COMPANY v. AH PUK TRANSPORTATION

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HEADNOTE

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                Section 18(3) of the Moneylenders Ordinance, Cap. 163.

                The factors which should be weighed and considered in determining whether or not to exercise the discretion reposed in Section 18(3) to waive non-compliance with the requirements of Section 18(1).

                Held, I declined to exercise this discretion.

1985 No. A3418

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The claim in this action started as being a claim on three dishonoured cheques. The defence which was filed referred to money lending transactions. It also referred to interest of 46.8% per annum being payable on the loans and it was contended that the transactions between platiff and defendant were of an extortionate nature and grossly contravened ordinary principles of fair dealing. The plaintiff then amended its statement of claim and claimed monies due and owing to it as a licenced money lender. This amended claim was based upon two loans and the interest which was payable thereon under an alleged agreement between the parties. It was claimed that the first loan had been made on the 12th of July 1982 in the sum of $60,000 and the second loan was made on the 22nd of February 1983 in the sum of $40,000. The interest claimed on both loans was 46.8% per annum.

2. The original claim was based upon the cheques which had been drawn by the defendant in respect of the loans. The total amount of these cheques was $112,900. The first cheque dated the 23rd of June 1984 was for $9,000. It was claimed that the consideration for this cheque was interest-which was payable on the principal amounts which were due and owing. The other two cheques represented the principal amounts which were payable subject to comparatively small modifications which were designed to reflect payments of interest which it was contemplated would immediately become payable. It will be appreciated from the summary I have already given that there is a substantial difference between the claim as originally envisaged and in its amended form. The main difference being the claim for interest at the rate of 46.8% on the principal sums which were advanced. Clearly such a claim has the effect of substantially inflating the amount being recovered. As a matter of caution, the plaintiff also included as an alternative claim his claim on the cheques.

3. There was very little in dispute so far as the facts of the case were concerned. The only witness to give evidence for the plaintiff was Mr LEUNG Chak-lam, who is the son of the proprietor of the plaintiff.  Mr Leung assisted his father in the conduct of his business as a licenced money lender. He claimed that he had been in charge of the relevant transactions with the defendant. He had had dealings with the defendant since early 1982 and it was his impression that the defendant had been a satisfied customer. In any event the defendant had continued to have dealings with him and had repaid an earlier loan and had up to the end of 1983 discharged payments of interest which had been payable.  He had not realized until about June 1984 that the defendant was experiencing severe financial difficulties. He came to realize this on account of the difficulty the defendant was encountering in effecting payments of interest. It was at this time that he had decided to make a reduction in the amount of interest which should be payable by the defendant. He had agreed to reduce the amount of interest payable from $390 per $10,000 per month to $300.

4. Mr Leung then described his modus operandi. When a customer asked for a loan, the rate of interest would be negotiated. In the present case the rate negotiated was $390 per month on every $10,000 advanced. When the rate was agreed the customer would draw a post-dated cheque in favour of the plaintiffs for the amount which had been advanced. The post-dated cheque served as a security for the loan. Sometimes the post-dated cheque would be made out in a larger sum than the amount advanced. It was sometimes Mr Leung's practice to include the interest which was payable in the post-dated cheque. If this course was not adopted it would be his practice to advance the customer the amount of the loan less the amount of interest which was payable.

5. It would appear that there was quite a large measure of informality pertaining to the transactions. The plaintiff would not necessarily insist upon the principal being repaid when the post-dated cheque became due. If the customer was able and willing to continue to make payments of interest the plaintiffs would not demand the repayment of the principal. If the date for the repayment of the principal was extended it would then be necessary for the customer to again attend upon the plaintiffs and give a further post-dated cheque in substitution for the one originally given. In a case such as the present one where the principal was allowed to remain outstanding for a considerable period it was sometimes the practice for the customer to give the plaintiff an undated cheque so as to obviate the necessity of repeated attendances at the plaintiffs' place of business. There was then an agreement between the parties that if the principal was to be repaid the plaintiffs would date the cheque and then present it for payment. The main point made by Mr Leung was that so long as the plaintiffs received interest they were prepared to allow the principal to remain outstanding. In the instant case Mr Leung had only decided to present the cheques relating to the principal sums when it became evident that the defendant was unable to fulfil his obligation to pay interest.

6. In cross-examination Mr Leung admitted that he had very little knowledge of the legal requirements for transacting money lending business. Mr Tse, who was representing the defendant, invited him to outline the sum total of his knowledge in this connection. He said that he knew that he could not charge more than a certain rate of interest. Also he could not ask for anything as a pledge. He was also aware that it was illegal to make demands for money to be repaid to him with menaces. The only other knowledge he professed to have was that a money lender must have a business registration certificate and a licence issued under the Ordinance. When pressed relating to the formalities required, he just repeated the practice he adopted of exchanging cheques with customers.

7. If his evidence is to be believed, he had no knowledge of the requirements laid down in Section 18 of the Ordinance. Even if he did have any such knowledge he certainly accepted that it was not the plaintiffs' practice to comply with the requirements of Section 18(1)(a) to furnish the customer with a written memorandum evidencing the essential terms of the transaction. This is a serious matter. The legislature clearly regards it as a matter of importance that anyone borrowing monies should be fully conversant with all of the important terms of the agreement which is concluded between themselves and anyone lending them money. Section 18(2) contains the matters which must be included in the memorandum. They are as follows:-

Mr Leung accepted that it was not his practice to prepare a memorandum which would include all or any of this information.

8. Equally serious Mr Leung admitted that he had not complied with the requirements of Section 18(1)(b) of the Ordinance. Section 18(1)(b) requires a money lender to give a borrower a memorandum in the form set out in the Third Schedule to the Money Lenders Regulations. The Schedule is in English and in Chinese characters and sets out in some detail the rights of a party who is obtaining a loan. Indeed, Mr Leung admitted that he had never seen a note or memorandum in the form of the Third Schedule as above.

9. It will be appreciated from the summary I have made of Mr Leung's evidence that there has been virtually no attempt by the plaintiffs to comply with the requirements of the Money Lenders Ordinance. It is difficult not to have some sympathy with Mr Tse when he described the plaintiffs as being 'licenced loan sharks'. No evidence was tendered by the defendants and I propose proceeding upon the basis that there is no dispute on the facts. I accordingly find that the plaintiffs made the loans when they did and that the cheques which were drawn by the defendant were dishonoured upon presentation.

10. The main issue which arises in this case is whether the plaintiff's claim as money lenders is enforceable. Section 18(3) of the Ordinance reposes in the court a discretion to order that a claim can be enforceable notwithstanding the fact that there has been some non-compliance with the requirements of Section 18(1)(a) and Section 18(1)(b). Section 18(3) reads:

11. Mr Chu Tak for the plaintiff referred me to a line of New Zealand cases where the courts had attempted to formulate principles in exercising a similar discretion which was exercisable under their legislation. The cases of Ross Cole Investment Corporation Limited v. Near Fashions Limited ⁽¹⁾ and Marac Finance Ltd. v. Virtue ⁽²⁾ were authority for the proposition that the most important consideration to be borne in mind by the court was whether the borrower had suffered any prejudice as a result of the non-compliance with the statutory requirements. Mr Chu Tak argued that it was manifest from the facts of the present case that the defendant had not suffered any such prejudice. He had received substantial loans and had clearly fully understood all of the salient features of the transactions. He had been willing to go along with the arrangements and had repaid the principal on an earlier loan and interest payments on the loans, the subject matter of this action. It would therefore be an appropriate case to exercise the discretion reposed by Section 18(3) in favour of the plaintiff. He also referred to the New Zealand cases of Adams and another v. Paul's Properties Limited⁽³⁾, Birch v. Shaw and another⁽⁴⁾, Combined Taxis Co-operative Society Limited v. Slobbe⁽⁵⁾ as being cases where the New Zealand Courts had to a greater or lesser extent been prepared to mitigate the rigours of the money lending legislation. I consider that the case which offers the most assistance in this connection is Adams and another v. Paul's Properties Limited⁽³⁾. Woodhouse, J. extended the scope of the matters which should be weighed by the court and had this to say at p.171:

"I think that in order to estimate 'the nature, extent and effect' of the original default the Court would need to take into account the way in which the transaction had developed. Attempts by a moneylender during the course of the contract to make use of some objectionable feature of it could well have significance, in my opinion, just as the size of the principal sum still outstanding and its proportion to the original loan could influence a decision as to the equities, not only as between the parties but also in relation to the regulatory purposes of the Act as a whole. I think that the circumstances to be taken into account should include such matters as the relative status of the parties, the nature and extent of the default, the way in which it arose, the implications for the borrower,. and the attitude of the lender and the general appearance of the contract throughout. "

With respect it seems tome that Woodhouse, J. has adopted a very sensible approach and I am satisfied that there is nothing contained in Section 18(3) of our Ordinance which would preclude me from canvassing all of the matters he refers to. There is only one case which Counsel were aware of which deals with the exercise of this discretion in Hong Kong. It is the unreported case of Lee Wang Investment Co., Ltd v. Leung Boon Sing⁽⁶⁾. Deputy Judge Nazareth (as he then was) did not have the benefit of having cited to him the New Zealand cases I have referred to. However, he also adopted a liberal approach to the exercise of the discretion and he considered a wide range of circumstances. I am satisfied that the correct approach to adopt is to consider all of the matters referred to by Woodhouse, J.

12. In considering the exercise of this discretion two matters stand out as being particularly significant. The first is the rate of interest which was charged. It is an extremely high rate of interest and does net fall very far short of coming within the category of extortionate loans. The second feature I would refer to is what can best be described as the blatant disregard of the provisions of the Money Lenders Ordinance. It would appear from Mr Leung's evidence that no attempt was made either with the defendant or any of their other customers to comply with the requirements of Section 18. In none of the New Zealand -cases which I have referred to were either of these features present. In all of the cases the rates of interest were within reasonable bounds and some attempts had been made to comply with the requirements of the law.

13. I will next consider the passage in Woodhouse, J.'s judgment where he refers to attempts by the money lender during the course of the contract to make use of some objectionable features offered. Mr Leung agreed when giving evidence that the consequence of proceeding in the manner the plaintiffs did and exchanging cheques was to enable the plaintiff to have complete control over the situation. By holding undated or postdated cheques, they could at any time effectively call up the principal without necessarily communicating with the borrower. If it suited them they could continue to receive a very high rate of interest while the borrower was able to continue to afford the payments. It would seem to me that the plaintiffs placed themselves in a highly advantageous position and they achieved this by totally disregarding the relevant legislation.

14. I think that it is also necessary for me to consider the wider implications of this case. What are the implications if I exercise-this discretion in favour of the plaintiffs. As I have already indicated they have chosen to disregard the provisions contained in Section 18 of the Ordinance. If in a flagrant and obvious case such as the present one I exercise the discretion in favour of the plaintiffs there would surely be very few cases where it would be proper to withhold the exercise of the discretion. This would mean that money lenders could disregard the operation of the law with virtual impunity. I do not think that this is what was intended by Section 18(3). Undoubtedly there are excellent reasons why the legislature chose to lay down the requirements contained in Section 18. One of the reasons surely would be to help prospective borrowers from acting against their own best interests. It is also clearly the intention that borrowers should be made fully conversant with their rights. I can think that there would be few occasions when a court would be prepared to exercise this discretion in favour of a money lender who had made little or no attempt to comply with the requirements of the law. It is perhaps worth observing in passing that the legislature appears to take a serious view of contraventions of the requirements of the Money Lending Ordinance. Serious criminal sanctions are included in the Ordinance for non-compliance.

15. Having considered all of the matters which seem to me to be relevant, I have come to the conclusion that this is not a case where I can invoke the provisions of Section 18(3) in favour of the plaintiff. The consequence of this is that the plaintiffs claim for the recovery of principal and interest is unenforceable. It also follows from the wording of Section 18(1) that the plaintiff's claim on the cheques also cannot succeed. It is provided that no security given for monies lent can be enforceable if there has been non-compliance. The result of all of this is that the plaintiff's claim must be dismissed. The defendant will be entitled to his costs.

(1)    [1958] N.Z. L.R.55

(2)    [1981] 1 N.Z.L.R. 586

(3)    1965 7 N.Z.L.R. 161

(4)    [1963] N.Z.L.R. 927

(5)    [1972] N.Z.L.R. 354

(6)    (unreported) HCA 14024 of 1983