XCHRX ORIX ASIA LTD. v. GRANT FORWARD INDUSTRIAL LTD.

HCCL79/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.79 OF 1999

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J U D G M E N T

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1. This is an application for summary judgment by the plaintiff, a leasing company, against the four defendants in respect of three different loans made by the former lender, Japan Leasing (Hong Kong) Limited ("Japan Leasing") to the four defendants - the 1st defendant as the borrower with the 2nd, 3rd and 4th defendants as guarantors - in respect of three separate facilities which are evidenced in, respectively, a facility letter in 1994 and another facility letter in 1997. The 1997 facility is really by way of a roll-over of the 1994 facility.

2. The plaintiff was assigned the loans and their securities after Japan Leasing got into financial difficulties and the assignment took place in 1999. When Japan Leasing got into difficulties, the defendants stopped paying the instalments. The amount now outstanding by the defendants under the three loans totalled at more than $11 million.

3. At the hearing, a number of points were raised and the application by the plaintiff is two-fold : one is for summary judgment against each and every one of the four defendants and, alternatively, for interim payments against all or some of the defendants. The hearing has been helpfully focused and it is possible for this court to say that so far as the second loan is concerned, that is, the Facility under 'B', which is said to be a trade facility, I have taken the view that it is to be exempted from the operation of the Money Lenders Ordinance. The Money Lenders Ordinance, by definition, under section 1 exempts, as respect a loan specified in Part 2 of Schedule 1, any person who makes such a loan under the definition section of a "money lender". Paragraph 11 of Part 2 of Schedule 1 reads :

"A loan made to a company where the loan-

(a) forms part of a transaction involving the export from, or the import into, Hong Kong of goods or services; and

(b) is for the purpose of facilitating that export or import, as the case may be, of those goods or services."

4. The narrow issue between the parties at the hearing on the matter of the exempted loan under Facility 'B' of the facility letter is whether in relation to the three separate loans, two of which are admittedly in respect of import from France, whether the third loan is also exempted or not. It seems to me, having regard to the wide wording of paragraph 11, that the third loan (which is said to be in relation to goods supplied in Hong Kong), also comes within paragraph 11. Therefore, I have come to the view that the whole of the facilities as pleaded in paragraph 16 of the Statement of Claim under 'Trade Finance Facilities' and also the interests pleaded in paragraph 18 of the Statement of Claim, at page 9, also under the heading "Trade Finance Facilities", are in respect of trade finance facilities and are fully recoverable. Therefore, in relation to that trade finance facility under Facility 'B', I order that judgment be entered against all the four defendants in the sum of $1,831,672.52.

5. That leaves the other two facilities, that is, Facility 'A', in relation to the mortgage of $4 million and the Standby Facility under 'C', again of $4 million.

6. A large number of defences were raised and the most powerful one that was raised is the one concerning the applicability of section 20(4) of the Money Lenders Ordinance. Section 20 of the Money Lenders Ordinance reads as follows :

" (1) A money lender who makes any agreement for the loan of money in relation to which security is provided shall within 7 days after the making of the agreement give to the surety (if a different person from the borrower)-

(a) a copy of the note or memorandum in writing made under section 18(1);

(b) a copy of the security instrument, if any; and

(c) a statement in writing signed by or on behalf of the money lender showing-

(i) the total sum payable under the agreement by the borrower;

(ii) the various amounts comprised in that total sum with the date, or the mode of determining the date, when each becomes due.

(2) Without prejudice to subsection (1), a surety may at any time during the continuance of an agreement (whether made before or after the commencement of this Ordinance) in relation to which the security is provided require the money lender by notice in writing to furnish him with a statement in writing signed by or on behalf of the money lender showing-

(a) the total sum paid under the agreement by the borrower;

(b) the total sum which has become payable under the agreement by the borrower but remains unpaid, and the various amounts comprised in that total sum, with the date when each became due; and

(c) the total sum which is to become payable under the agreement by the borrower, and the various amounts comprised in that total sum, with the date, or the mode of determining the date, when each becomes due.

(3) Subsection (2) does not apply to a request made by a surety less than 1 month after a previous request under that subsection relating to the same agreement was complied with.

(4) If a money lender fails to comply with subsection (1) or a request to which subsection (2) applies he shall not be entitled, while the default continues, to enforce the security so far as provided in relation to the agreement."

The defendants guarantors submitted that there had been a non-compliance with section 20(1) which is of course a provision whereby the lenders have obligation to give to the surety, that is, the guarantors, within seven days after the making of the agreement, certain documentation. I think it is not in dispute that there had been failure by the lender to do this.

7. What is, therefore, the consequence of the failure of the lender vis-à-vis the guarantors to comply with section 20(1)? The plain reading of section 20(4) suggests to me, as submitted by Mr Lee for the defendants, that the guarantees cannot be enforced. I think his submission is correct. This provision is to be compared with the much more lenient consequence of non-compliance under section 18 where, for example, under section 18(3), the court has a substantial discretion, notwithstanding the non-compliance of section 18(1). So, I am driven to the conclusion, in the absence of binding authority, that at least an arguable case has been made out by the guarantors that they are not liable for the loans. It seems to me, therefore, that unconditional leave to defend must be given to the 2nd, 3rd and 4th defendants.

8. As for the 1st defendant, a number of points had also been raised. It seems to me that having regard to the nature of the original lender, that is, Japan Leasing, which is, by all accounts, a perfectly respectable institution carrying on a valuable financial service in Hong Kong; the character of the borrower who has, by all accounts, a great deal of experience in matters of finance and trade; and the terms of the Facilities which, when one looks at it (whether in terms of the facility letter of 1994 or the facility letter of 1997) that the loans in question are more than reasonable. In fact, they are surprisingly favourable to the borrower. Having regard to all these terms and the circumstances, I can only say that this is a case where I cannot imagine any court at trial would come to a view that notwithstanding any technical breaches that might have taken place, the lender should be left without being able to recover, at least, the principal sums advanced.

9. I know that there are a great deal of argument about the various provisions, the default interest, the interest rates that had been unilaterally increased or imposed by the lender on the borrower and the various other matters of complaints, but having regard to the nature of the whole case, it seems to me that there can be no doubt that at the end of the day, the plaintiff would be able to recover at least the principal, perhaps minus two items, i.e., the $20,000 upfront fee under both facilities. So, the view I have taken is that this is a suitable case where interim payment should be made by the 1st defendant to the plaintiff in the sum of $7,774,875 minus $40,000, namely, $7,734,875. This sum is to be paid immediately by the 1st defendant to the plaintiff.