LIGGARS LTD. v. DC FINANCE (HOLDINGS) LTD. and Another

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

Action No. A11787 of 1997

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JUDGMENT

Action No. A11787 of 1997

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The transactions

1. The Plaintiff ("Liggars") is a company incorporated in the British Virgin Islands. It is the borrower under a Loan Agreement dated 29th November 1996 ("the Loan Agreement") entered into with the 2nd Defendant ("Universe"), a Hong Kong company, as lender. The purpose of the loan was to provide the Plaintiff with short term finance in the aggregate amount of HK$450,000,000.00. The Loan Agreement was subsequently varied by two Deeds of Variation, the details of which are not immediately relevant. Security for the loan included a Mortgage executed on 28th February 1997 over certain properties in Des Voeux Road West in Hong Kong ("the Mortgage").

2. The 1st Defendant ("DC Finance") is a Bermudan company listed in Hong Kong. It wholly owns Universe which had a paid up capital in 1996 of HK$2.00 and which was described in DC Finance's Annual Report for that year as having "loan financing" as its principal activity. DC Finance also holds a number of other subsidiaries, several of which carry on like activities.

3. Pursuant to the Loan Agreement, the HK$450,000,000.00 loan amount was drawn down by Liggars in two tranches on 29th November 1996 and 28th February 1997 respectively. Various fees, commissions and interest payments were also made by Liggars.

4. On 27th March 1997, Liggars defaulted on payment of an interest installment due. By various letters from Universe and its solicitors, the whole of the outstanding loan was made due and payable. Liggars managed only to make repayment in the sum of HK$3,000,000.00 on 6th June 1997.

5. None of the facts referred to above are in dispute.

The proceedings between the parties

6. On 5th November 1997, Liggars issued the Writ in this Action. As indicated in the Statement of Claim subsequently served, Liggars seeks a declaration that the Loan Agreement is illegal and unenforceable by reason of the Money Lenders Ordinance (Cap. 163) ("the Ordinance").

7. Liggars has sued both DC Finance and Universe, alleging that Universe in fact entered into the Loan Agreement as agent for or nominee of DC Finance. It appears that this was an argument developed on the premise that while Universe was not a registered money lender, DC Finance was, this being possibly relevant in a context discussed below. However, it is now accepted that such premise was erroneous and that neither DC Finance nor Universe are registered as money lenders under the Ordinance.

8. On 20th November 1997, Universe issued an Originating Summons in MP4001 of 1997, seeking to enforce the Mortgage. The claim in those proceedings (by the Originating Summons as amended on 20th January 1998) is for recovery of principal in the sum of HK$450,000,000.00, accrued interest amounting to HK$89,733,929.39, a sum in respect of unpaid rates on the mortgaged premises and contractual interest at the daily rate of HK$362,504.10 until payment. Universe also seeks an Order for possession of the mortgaged premises.

9. By a summons issued on 29th December 1997, DC Finance and Universe applied to strike out the Writ and Statement of Claim under Order 19 rule 19 or under the inherent jurisdiction on the grounds that they are scandalous, frivolous and vexatious or otherwise an abuse of the process.

10. Master Jones granted the Order and, on 9th March 1998, struck out the Writ and Statement of Claim on the basis that they are scandalous, frivolous and vexatious, dismissing the Action in consequence.

11. There are listed before me today (i) Liggars' appeal against the said Order of Master Jones striking out the Action; (ii) Universe's application to join Guangdong Finance Company Limited ("Guangdong Finance") as a Plaintiff in the Originating Summons proceedings; and (iii) the hearing of the Originating Summons to enforce the mortgage.

12. By the consent of all parties, I adjourned all these matters to be heard in open court solely as a matter of convenience. I also granted Universe's application to join Guangdong Finance as a party in MP4001 without any opposition on the part of Liggars. I was then invited by both parties to deal first with the striking out appeal. However, they each invited me to adopt a different course in doing so.

13. Mr Nigel Aiken SC, who appeared on behalf of Liggars, submitted that the question of law raised by the allegation of illegality is novel and arguable and that it possibly has far-reaching consequences. He submitted that accordingly, in line with cases such as Lonrho v Fayed [1992] 1 AC 448 at 469B; and Lonrho v Tebbit [1991] 4 All ER 973 at 979; and [1992] 4 All ER 280 at 285-287, I should decline to resolve that question finally at the present stage but should instead consolidate the present Action with the Originating Summons proceedings and give directions for the further progress of those matters.

14. Mr Robert Kotewall SC, who appears for DC Finance and Universe, submits that the point is a short one, requiring merely construction of the definition of "money lender" in the Ordinance and that nothing is to be gained by putting off resolution of the question. He points out that the cautionary remarks made by the various courts concerned with the Lonrho litigation arose in the context of a refusal to stifle summarily the Plaintiff's attempts to establish causes of action involving economic torts which were still in the process of development.

15. Having heard full argument on the point of construction, I have decided to adopt the approach advocated by Mr Kotewall. In my view, the question is indeed a short and self-contained one. It involves no material questions of fact in dispute and can just as easily be decided now as by the trial judge.

The illegality argument

16. The crucial question is whether Universe and (in so far as it may have been involved in the transaction) DC Finance are companies caught by the definition of "money lender" in section 2(1) of the Ordinance. If the lender(s) are caught within that definition, it is common ground that the Loan Agreement contains provisions, e.g., those for charging compound and default interest, which would make it an illegal agreement under section 22(1) and that sections 23 and 27 would operate to exclude recovery by Universe (and/or DC Finance) of the sums claimed, subject to any discretionary relief that the Court may grant.

17. Section 2(1), so far as material, provides as follows:-

"In this Ordinance unless the context otherwise requires: ..... 'money lender' means every person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business, but does not include (a) a person specified in Part 1 of Schedule 1; or (b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such a loan".

18. For present purposes, Schedule I, Part 2 para 2 is important. The whole of Part 2 is headed "Exempted Loans" and para 2 states as follows:-

"A loan made to a company secured by a mortgage, charge, lien or other encumbrance (a) registered, or to be registered under the Companies Ordinance (Cap. 32); or (b) which would, in the case of a company referred to in paragraph (b) or (c) of the definition of 'company' in section 2(1), be able to be registered under that Ordinance if that company were a company referred to in paragraph (a) of that definition."

19. This provision makes it necessary to turn to the definition of "company" in section 2(1) of the Ordinance. This provides as follows:-

"'company' means a body corporate (a) incorporated under the Companies Ordinance (Cap. 32); (b) incorporated by any other Ordinance; or (c) incorporated or established outside Hong Kong."

The argument on behalf of Universe

20. It is submitted on behalf of Universe that the Loan Agreement is clearly an exempted loan within the meaning of Schedule I, Part 2 since it undoubtedly involves "a loan made to a company", namely Liggars, "secured by a mortgage". Given that Liggars is a BVI company and so falls within sub-paragraph (c) of the definition of 'company' in section 2(1) of the Ordinance, the Mortgage is an encumbrance which could be registered under the Companies Ordinance if Liggars had been a Hong Kong company. In particular, Universe submits that it would be registrable as a charge on land or any interest therein under section 80(2)(d) of the Companies Ordinance.

21. Once it is accepted that the relevant transaction is the making of an exempted loan under Schedule I, Part 2, Universe argues that it must fall outside the definition of "money lender". This is because that provision plainly states that the definition ".... does not include ..... (b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such a loan". Universe being "a person who makes such a loan", so the argument runs, is excluded from the definition of "money lender", not for all purposes, but "as respects" that exempted loan.

22. It follows, so Universe submits, that sections 22, 23 and 27 of the Ordinance do not apply since in each case, by express language, they only apply to persons who are "money lenders" within the said definition. It follows that no illegality or unenforceability exist.

23. Universe also argues that on this basis, it matters not at all whether Universe was merely DC Finance's agent or nominee. It would make no difference if the principal lender under the Loan Agreement was DC Finance instead of Universe. It would still be an exempted loan under Schedule I, Part 2 and in consequence, DC Finance would be excluded from the definition.

24. It may perhaps at one stage have been contemplated by Liggars that its argument might be strengthened by the contention that DC Finance was a registered money lender and accordingly, that if it was the true lender through the agency of Universe, it ought, by reason of its registered status, be held to be a money lender for all purposes. Since, as I have stated above, DC Finance is not in fact a registered money lender, this point, though mentioned in the skeleton arguments, was not pursued by Mr Aiken at the hearing.

The argument on behalf of Liggars

25. The contrary argument on behalf of Liggars involved splitting the definition of "money lender" into two parts. Focussing in the first place on the words which precede the exclusionary words which refer to exempted persons and exempted loans listed in Schedule I, Mr Aiken started his argument by pointing to the acknowledged "loan financing" activity of Universe and contending that this prima facie brought Liggars within the definition of "money lender".

26. He then argued that as a matter of construction, the words stating that the definition ".... does not include ..... (b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such a loan", refer only to persons who were not already "money lenders", in other words, persons, like Universe who, by their money lending activities, were caught by the words which precede the exclusion.

27. Mr Aiken argued that "the exception does not allow a money lender to divest himself of the label and so avoid the controls of the Ordinance by the simple device of dressing up his business as a Schedule I, Part 2 loan."

28. He drew attention to sections 33A and 33B of the Ordinance which give the Registrar powers to "exempt a class of persons (whether money lenders or not)" from specified provisions of the Ordinance. This, Mr Aiken argued, showed that the draftsman was careful to use language distinguishing between persons who were and those who were not money lenders. It follows that if the draftsman had intended the money lender to avail himself of what Mr Aiken called "the exception" in the section 2 definition, he would have inserted a phrase like the "(whether money lenders or not)" phrase used in sections 33A and 33B.

29. Mr Aiken argues that it follows that Universe (and insofar as necessary DC Finance) was caught by the definition and unable to avail themselves of the Schedule I, Part 2 "exception". Universe was therefore a "money lender" for these purposes and its Loan Agreement was illegal and unenforceable by virtue of sections 22, 23 and 27 of the Ordinance.

Conclusion as to illegality

30. I am, with respect, unable to accept Mr Aiken's argument and have reached the firm conclusion that the construction contended for by Mr Kotewall is correct.

31. I cannot accept that one can legitimately divide up the definition in the way contended for. All of the words in that provision, including the words which exclude exempted persons and persons who make exempted loans, together constitute the definition of "money lender" for the purposes of the Ordinance. In my view the words are unambiguous and clear. Where any person makes a loan to a company secured by a mortgage, that person makes an exempted loan and is not to be regarded as a money lender as respects that loan. It matters not whether that person is legally a money lender for the purposes of any other loan or is licensed as a money lender under the Ordinance or carries on business as such.

32. The interpretation urged on Liggars' behalf requires the Court to read in words cutting down express language which, unless cut down, excludes from the definition "any person" who makes an exempted loan. It requires, for instance, insertion into the definition, words such as: "provided that person is not one whose business is that of a money lender". I can see no warrant for importing such a qualification into the section.

33. Moreover, the argument is inherently objectionable as question-begging and circular. The purpose of the provision is to define the concept of "money lender" and a definition which excludes from its scope someone who is "already a money lender" begs the question which the section is there to answer. Indeed, in drawing the distinction between persons who are and those who are not money lenders, sections 33A and 33B pre-suppose that a clear definition exists. Use of the distinction in those sections does not throw any light on what that definition itself is.

34. Mr Aiken also argued that a construction which excludes lenders of exempted loans from the definition of "money lender" cannot have been intended as a matter of policy as this would open the door to unscrupulous money lenders circumventing the statutory controls. With respect, I do not see that the interpretation which I have held to be correct implies a policy which should in any way be regarded as dubious. Schedule I, Part 2 excludes from the regulatory framework persons who make loans to companies against formal, registrable classes of security. This may cogently be considered to express the legislative intention that the Ordinance be primarily directed at the protection of individuals and not corporate borrowers able to put up such security. One may note in this context that where excessively high rates of interest are charged, the Legislature has intervened by section 24 to invalidate the loan whether or not made by a money lender. Plainly, in other cases, the policy is to limit the scope of illegality to persons caught by the definition of "money lender". In any event, any inadequacies or "loopholes" that may exist in the Ordinance are matters to be cured by legislation and not by a strained process of construction.

35. In the circumstances, I have reached the firm conclusion that the argument that Universe and/or DC Finance are caught by the Money Lenders Ordinance resulting in the unenforceability of the Loan Agreement is unsustainable. I therefore dismiss the Appeal from the Master with costs, these proceedings certified fit for two counsel.

36. I will hear counsel as to disposal of the Originating Summons.

JUDGMENT MP4001 of 1997

37. At the conclusion of the hearing of the Appeal against the Master's decision in Action No. A11787 of 1997 and after I delivered judgment therein, I invited submissions as to how the trial of the mortgage action in these Miscellaneous Proceedings should be disposed of.

38. Mr Aiken submitted that notwithstanding my ruling above, I ought to adjourn the trial and direct pleadings to be filed. He indicated that he wished to consider whether Liggars may have a counterclaim in equity based on the argument that certain features of the Loan Agreement involving compound interest and payment of a large commission make that agreement an unconscionable bargain. However, as he had been brought into these proceedings very late in the day, he was not in a position to formulate this argument with any precision.

39. Having heard submissions from Mr Kotewall, I refused Mr Aiken's application for an adjournment. While I have every sympathy for Mr Aiken given the shortness of time that he has had to consider the matter, Liggars has previously always had access to highly competent and experienced legal advice, including the advice of leading counsel who was Mr Aiken's predecessor. This is the trial of the Originating Summons which was issued in November 1997. If any arguments by way of defence additional to the illegality argument that I have disposed of were to be raised, they could and should have been raised in the affidavits filed. Indeed, in February 1998, Mr. Lin affirmed on Liggars' expressly reserved the right then to put in further evidence. Clearly, the question of whether any further issues were to be raised on Liggars' behalf received due consideration and if by now no such issues have been formulated, I am not prepared to adjourn the trial simply to allow further time for consideration.

40. On the resumption of the trial, Mr Aiken valiantly submitted that I ought, on the evidence as it stood, rule that the Loan Agreement was an unconscionable bargain and so grant equitable relief to Liggars against enforcement of the Mortgage. He pointed in particular to Clause 6.05 of the Loan Agreement which allows the lender to charge default interest at a rate of 28% p.a. or at such other rate as it may determine.

41. In my judgment, the evidence as it stands is inadequate to raise any issue as to unconscionability and no basis for the application of any such equitable doctrine has been made out. As I have held the illegality argument unsustainable, no further issues remain by way of defence against enforcement of the Mortgage. The facts as to default and as to the amounts outstanding are not in dispute. Accordingly, I order that there should be judgment for the Plaintiffs in these Originating Summons proceedings.

Order:

42. Payment to be made to solicitors for the Plaintiffs within 4 weeks of today's date comprising (a) repayment of the principal sum; and (b) payment of interest accrued under the Loan Agreement and Mortgage as at today's date; and (c) the sum of $127,890 in respect of unpaid rates. Thereafter, interest to be paid at the contractual rate less all net receipts as mortgagee in possession.

43. Payment made to the Plaintiffs' solicitors not to be released to their clients in the first instance for 7 days following receipt and if a Notice of Appeal is lodged and served on the Plaintiffs within such time, such payment not to be released until determination of the appeal by the Court of Appeal or further order.

44. Possession of the mortgaged premises be delivered by the Defendant to the Plaintiff within 14 days of this Order.

45. Liberty to apply for the purposes of implementing this Order if necessary, liberty to make such application before another Judge.

46. Costs of these proceedings to the Plaintiffs.