HONG NIN BANK, LIMITED v. ROBERT H.P. FUNG

1986, No. A5736

IN THE HIGH COURT OF JUSTICE

HONG KONG

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JUDGMENT

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1. These are an appeal and cross-appeal from a decision of Master Woolley given on 26th November, when he gave the plaintiff Bank leave to sign final judgment in the sum of $2.66m. and the defendant unconditional leave to defend the balance.

2. That decision was apparent arrived at on the basis that there was, in the Master's view, no prima facie evidence sufficient to show any breach of section 23 of the Banking Ordinance because the 12.66m. claim was a 1986 transaction, and no 1986 figures were available for the Bank's capital reserves. With respect to the Master, I do not think that is an approach to this case which can really be upheld. One has to look at the fundamentals more closely.

3. There are two defences which have been adumbrated on the documents. The first is a potential defence of undue influence. I am bound to say that I am not very impressed with that. It seems to me that the mantle of Herbert Bundy lies rather uneasily on the shoulders of this defendant. But a much more difficult point to my mind has been taken under section 23 of the Banking Ordinance (Cap. 155).

4. The Banking Ordinance in this respect is indistinguishable from the Deposit Taking Ordinance which was the subject matter of the decision of the Court of Appeal in 1984 in the case of the Whitehall Finance Limiied v. Win and Fair Securities Co. Ltd.⁽¹⁾. The Court then found that if loans were made in contravention of that Ordinance, the defence of illegality arose in favour of the borrower. This is a fairly far reaching decision, because the prohibition both in that Ordinance and in the Banking Ordinance is against granting loans or permitting loans to be outstanding in a certain contingency. This can create a situation where the original granting of the loan and the contract may be prefectly valid. But the situation may become illegal under the Ordinance because of some change in the situation, e.g. some alteration in the Reserves. Two things can then happen. If there was a change which produces loans which exceed the permitted percentage; first a criminal offence is created and secondly, the defence of illegality arises. So there is then no way in which the company or the person making the loan can correct the situation.

5. This result was reached by the Court of Appeal on the basis of the construction of a section 240(2) which deals specifically with the making of the loan rather than its continued existence. But that decision binds me. It is plain that that decision applies equally to the Banking Ordinance. On the authority of that decision, I must necessarily conclude, that loans made or permitted to remain outstanding in excess of the permitted percentage under section 23 are illegal and are irrecoverable. There is no other option open to me. Therefore, it necessarily follows that I have to look rather carefully at the impact of section 23.

6. Here two arguments are advanced in respect of figures which have been put forward somewhat tentatively by the defendant, who has not got access to all the figures (although somewhat surprisingly, he has apparently been assisted by the Bank's auditors in putting figures before the Court).

7. The first argument is that upon the basis of section 23(1) and section 23(10)(c) in substance, principal debtors and guarantors are lumped together. Because under section 23(10)(c):-

"all advances shall be deemed to be granted to and to be outstanding in relation to any person liable or contingently liable thereon whether he is principal debtor, guarantor or otherwise. "

That construction looks on the face of it to be probably right. This means that for the purposes of assessing the impact of this section in relation to either of the other Fung brothers, account has to be had not only of their liability as principals, but also of their liability as guarantors. This, on the figures that I have seen, has a considerable impact upon the potential effect of this section.

8. The second issue which arises is much more debateable. The question is to what meaning is to be given to section 23(1)(d) and particularly to the phrase "to any person"? Is that to be read as "to any person" and therefore as capable of meaning "to any person or persons" having regard to section 7 of Cap. 1, or is it confined to any one person.  It may well be that the legislature intended to say "any one person". That is the phrase which appears now in the Banking Ordinance. But unfortunately, in this section, there is an apparent deliberate change of language. The phrase "any one person" appears in subsection (a).  It also appears again in subsection (b)(ii). So that what the defendant is able to say here is this. The legislature apparently have changed their mind. The legislature apparently have deliberately left out the word one in subsection (d). Therefore in. subsection (d) "any person" can mean persons. That enables the defendant to argue that it is possible in this case to put together the loans to the Fung Brothers collectively, and to the Companies they controlled, because individually, they do not control a single company. This creates much more serious breaches, if that construction is right, of section 23 on another set of figures.

9. I am concerned about this construction. Because I have a feeling that this is something which can probably be dealt with upon the basis that this construction would have such extravagant consequences, that in the context of a criminal statue, the Court would be justified, on a full consideration of the whole matter, in reading back in the word "one" which the legislature has apparently deliberately omitted. But I do not believe that the argument which has been advanced by this defendant, is unarguable for the purpose of O.14. I think that as complicated a question of construction as this, should not be dealt with simply by a judge on O.14 proceedings. I think this is a matter which justifies the rather fuller consideration that a Court is able to give at a trial, rather than within the confines of an O.14 hearing.

10. Therefore, it seems to me that there are two points, one which I think, I probably right, and the other which I cannot dismiss as unarguable which arise on the construction of section 23. If one or other of those points is right, then they have an impact upon this defendant's liability which it is impossible, as far as I con see, to measure at this moment. The Court of Appeal in the Whitehall Finance case⁽¹⁾ had before them some fairly complicated figures which apparently had been agreed between counsel. But just reading that decision without the benefit of that schedule, it is, I find, very difficult to tell exactly what happened and to measure exactly the impact of this section. This Ordinance operates, first of all by way of defence to the borrower which is the first point. Secondly, it may operate in favour of the guarantor, who can say that this effect of the Ordinance may go to the validity of the consideration for the guarantee, depending upon the state of account which then existed, and the degree of excessive borrowing which he may be able to establish on one or more constructions of this section at the trial. This is not to my mind a fishing expedition such as has been suggested in the case of some defences which are raised under 0.14. It is a simple case that an arguable defence can be seen to arise under a particular Ordinance, the full impact of which cannot start to be assessed without fuller investigation and a trial.

11. In those circumstances, I have come to the conclusion that this is not a case where the Court would be justified in shutting the door upon this defendant under 0.14. This is a case where, notwithstanding the fact that these are claims under guarantees, which as for as I can see, were willingly entered into, there should be unconditional leave to defend the whole sum. To that extent, I would allow the cross-appeal against Master Woolley's decision.

(1) Unreported: