CELESTIAL FINANCE LTD v. YU MAN HON AND OTHERS

FACV No. 2 of 2004

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION 

FINAL APPEAL NO. 2 OF 2004 (Civil)

(ON APPEAL FROM CACV No. 2 of 2003)

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J U D G M E N T

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Mr Justice Bokhary PJ:

1.  At the conclusion of the hearing, we announced that, for reasons to be handed down later, we allowed the appeal so as to set aside the Court of Appeal’s order and reinstate the appellant’s action against the respondents.  Our reasons, which we now hand down, are those given by Mr Justice Ribeiro PJ for the Court.  As to costs, we awarded the appellant its costs here and in the court below in any event, leaving the basis of taxation of such costs to be dealt with at first instance upon disposal of the action.  That is the costs order which the appellant sought and the respondents supported.

Mr Justice Ribeiro PJ:

2.  The appellant is a registered money lender.  On 30 September 1997, it lent $5 million to the 1^st defendant.  At the same time, it took security in the form of personal guarantees and a mortgage from the 2^nd and 3^rd defendants, the respondents in this appeal. 

3.  On 10 September 2001, the action with which we are concerned was brought by the appellant against the three defendants. And on 26 November 2002, it obtained a default judgment for $2,949,276.48 plus interest against the 1^st defendant as principal debtor.  That defendant has taken no further part in these proceedings.

The present appeal

4.  This appeal arises from the respondents’ application to strike out the appellant’s claim as frivolous, vexatious and an abuse of process.  They resist the claim on various bases, but the striking-out application proceeds on a single ground.  The respondents assert that since the appellant failed to comply with s 20(1)(c) of the Money Lenders Ordinance, Cap 163 (“the Ordinance”), it has lost its entitlement to enforce its security, making its claim unsustainable.

5.  Master Shum dismissed their application, as did Deputy High Court Judge Fung (HCA 4044/2001, 12 December 2002).  However, the Court of Appeal (CACV 2/2003, Rogers VP and Le Pichon JA, 9 July 2003) allowed their appeal, struck out the pleading and dismissed the appellant’s action against the respondents. 

The issue

6.  It is common ground that the appellant failed to comply with s 20(1)(c) of the Ordinance.  That provision requires a money lender who makes an agreement for a loan against security to be given by a surety, to provide to the surety, within 7 days after making the agreement, a written statement containing specified details of the loan (a “s 20(1)(c) statement”).  In the present case, the loan to the 1^st defendant was made on 30 September 1997 but the respondents were not supplied with a s 20(1)(c) statement until 23 May 2001, almost four years later, and therefore long after the stipulated 7 day period. The question is whether such non-compliance permanently extinguished the appellant’s right to enforce its security against the respondent sureties.

The relevant provisions

7.  Section 20(1)(c) must be read in the context of s 20 as a whole:

Section 20

(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.

8.  Section 18, referred to in s 20(1), is also relevant :

Section 18

(1)    No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be enforceable unless-

(a)    within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and

(b)    there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,

and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.

(2)    The note or memorandum shall contain all the terms of the agreement and in particular shall set out-

(a)    the name and address of the money lender;

(b)    the name and address of the borrower;

(c)    the name and address of the surety, if any;

(d)    the amount of the principal of the loan in words and figures;

(e)    the date of the making of the agreement;

(f)    the date of the making of the loan;

(g)    the terms of repayment of the loan;

(h)    the form of security for the loan, if any;

(i)    the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2; and

(j)    a declaration as to the place of negotiation and completion of the agreement for the loan.

(3)    Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.

The construction and effect of section 20

9.  The respondents’ case in support of striking out the appellant’s claim is based on arguments which had found favour with the Court of Appeal in the earlier case of Emperor Futures Ltd v La Belle Fashions Ltd & Others [2003] 1 HKLRD 424.  They succeeded below when the Court of Appeal applied that earlier decision to the present case. 

10.  The principal argument of construction relied on by the respondents centres on s 20(1) itself. It runs along the following lines: Section 20(1)(c) requires the relevant statement to be provided within 7 days.  That is an absolute requirement.  Once the money lender fails to comply, it is in default and loses its entitlement to enforce its security.  It is not permissible to modify or extend the 7 day period to permit compliance.  To construe that section, or any other section, as permitting such a result would be (as Mr Clive Grossman SC, leading for the respondents, puts it) to re-write s 20(1) to read: “shall within 7 days or as long as it likes thereafter......”.

11.  This was an argument adopted by Rogers VP in the Emperor Futures case.  His Lordship stated:

“...... Section 20(1) is clear in its terms that the copy of the note or memorandum must be provided within 7 days of the making of the agreement to give surety.  In contrast, section 20(2) which requires the provision of a statement after a request has been made, contains no time limit for providing the statement.  When the section is read as a whole it is clear that the failure to provide the copy of the note or memorandum within 7 days is a breach.  It is not a continuing default.  It is a default which occurs at the conclusion of the seventh day.  There is therefore no question of the default ceasing: if the copy of the note is not provided within 7 days, the breach has occurred and a copy of the note could never be provided as required within subsection (1) namely, within 7 days of its making.  In contrast, section 20(2) simply requires the furnishing of a statement.  Any failure to provide such a statement can be rectified at any stage because there is no time limit.” ([2003] 1 HKLRD 424 at §68)

12.  We do not accept such a construction.  It misapprehends the purpose of s 20(1) and fails to give proper effect to s 20(4).  What s 20(1) does is to impose an obligation on the money lender to provide the specified documents to the surety within the 7 day period.  It is concerned with defining the obligation and, concomitantly, with defining when a default occurs, namely, at the expiry of the 7 day period (but not before).  Section 20(1) is not concerned with prescribing the legal consequences of any default.  To ascertain what those consequences are, one must look to s 20(4) which provides:

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.

13.  Any argument as to the consequence of non-compliance must be based, not on any words contained within s 20(1), but on the provisions of s 20(4).  The latter subsection prescribes as the consequence of a default under eithers 20(1) ors 20(2), the deprivation of a money lender’s entitlement to enforce the security – but only “while the default continues”. 

14.  When the Emperor case came on appeal to this Court (see Emperor Finance Ltd v La Belle Fashions Ltd & Others (2003) 6 HKCFAR 402 at 440-441), the view expressed obiter in the principal judgment was that, contrary to the opinion of the Court of Appeal in that case, s 20(4) makes it clear that defaults under s 20(1) are not absolute but may be curable :

“110.    Section 20(4) is therefore expressly dealing with breaches of section 20(1) and expressly proceeds on the footing that such defaults do continue, since it provides that the security cannot be enforced ‘while the default continues’.  This, in my view, necessarily implies that the default is curable by eventual compliance, whereupon the enforceability of the security revives.  Thus, for instance, where the documents required to be given to the surety all exist or can be brought into existence but the money lender has simply omitted to give one or more of them to the surety, the security is unenforceable until such time as the default is cured by the surety being given the required documents.  Where a default is so curable, there is no need to invoke the court’s discretion.

111.     However, where the money lender fails to ensure that the borrower signs a section 18 memorandum before the money is lent or the security given, the money lender will necessarily be in breach of both sections 18 and 20.  He will be unable to give to the surety a copy of the memorandum duly made under section 18, this being a default which cannot be cured by subsequently drawing up a compliant memorandum since the section ties unenforceability of the loan to the absence of a signature before lending the money or taking the security.

112.     Section 18(3) deals with this situation, giving the court a discretion to permit enforcement in cases where the enforceability of the security is affected by virtue of some breach of section 18......”

15.  This Court agrees with the view so stated.  It is by giving effect to s 20(4) that one reaches the conclusion that the relevant defaults are continuing in nature (having commenced at the expiry of the 7 day period) and that they may be curable, so that when a default ceases, the entitlement to enforce revives.  Such a construction does not involve any attempt to re-write s 20(1).  The 7 day period referred to in that subsection is unaffected and continues to play its role properly understood: that of defining the money lender’s s 20(1) obligations and defining when a default occurs. 

16.  It was submitted on the respondents’ behalf that s 20(4) should somehow be read as confining the prescribed consequences of a default (ie, suspension of the entitlement to enforce the security “while the default continues”) only to failures to comply with s 20(2), leaving s 20(1) out of the picture.  But such a construction simply cannot be reconciled with the unambiguous wording of s 20(4).  The consequences are prescribed if there is a failure to comply either with s 20(1) or with s 20(2).  There is no warrant, as a matter of language, for excluding its application to a failure to comply with s 20(1).  There is also nothing to recommend such a construction as a matter of legal policy.  On the respondents’ argument, s 20(4) should be construed so that a four-year default in supplying a statement requested under s 20(2) would be curable, but not an 8 day delay in relation to a s 20(1)(c) statement.  It is impossible to see any justification for such a distinction.  

17.  In support of his construction, Mr Grossman argued that to accept that defaults under s 20(1) are curable by subsequent compliance would lead to a regime which is “too lenient” to the money lender and not sufficiently protective of the sureties who had not, on the face of the transactions, benefited from the loan.  A similar argument appears to have been accepted in the Court of Appeal below (see paragraph 11 of its judgment).

18.  We do not accept that line of reasoning.  The court is involved in an exercise of statutory construction and where, as in the present case, the statutory language is unambiguous, an appeal to considerations of policy alleged to underlie the legislation is incapable of displacing its clear meaning.

19.  We are in any event not persuaded of the existence or cogency of the alleged underlying policy considerations. 

20.  It is by no means necessarily true that a surety in a money lending transaction receives no benefit from the loan.  It may often be the case, as in Emperor Finance, that the borrower is merely the corporate vehicle of the surety (see (2003) 6 HKCFAR 402 at §89).  In any event, whether or not the sureties received any benefit, provision of security was obviously an essential condition of the appellant’s willingness to part with the $5 million by way of loan to the principal debtor.  In cases like the present, where there is no suggestion of duress, undue influence or anything similar, whether or not the sureties themselves benefited does not provide a reason for making it either more or less difficult for the money lender to enforce that security.

21.  One should not, in any event, approach the task of construction with any preconceptions as to the undesirability of “leniency” to money lenders or as to a desirable slant in favour of one or other of the parties.  The court is simply concerned to ascertain, as a matter of construction, what the statutory intention is.  In fact, the Ordinance sets out a protective regime that distributes the parties’ mutual rights and duties in a manner that is perfectly rational and which does not call for any remedial construction by the court.

(a)      Thus, it is clear that the focus of protection in the present context – both for the principal debtor and the surety – is on ensuring proper disclosure of all material terms to the principal debtor at the time of agreeing the loan and before the money is lent or the security is taken.  Accordingly, s 18(1) makes timely provision of the statutory note or memorandum a condition of enforceability – both of the principal debt and of the security.

(b)     As was pointed out at paragraph 111 of the Emperor Finance judgment cited above, a money lender who fails to ensure that the borrower properly signs a s 18 note or memorandum will necessarily also be in breach of s 20(1)(a) and so will be unable to rely on s 20(4) to cure that default.  The surety’s protection in this regard is therefore no less comprehensive than that accorded to the principal debtor.

(c)     But the Ordinance does not shut out the money lender entirely even if there is a failure to comply with the basic requirements of s 18(1). Section 18(3) – which again applies equally to the principal debtor and the surety – enables the money lender nevertheless to enforce the debt and the security if it can persuade the court that it is equitable to permit this.  This is where the statutory balance has been struck.

(d)     It is significant that s 18(3) only addresses s 18(1) defaults (including cases where such defaults necessarily lead to a default under s 20(1)(a)). No equivalent provision exists in relation to s 20(1) defaults simpliciter.  In our view, the reason for this is clear.  Where an underlying s 18 default is not involved, s 20(1) defaults are intended to be curable under s 20(4), making it unnecessary to provide for the court’s discretionary relief.  Since such defaults are only curable where the relevant documents (especially the s 18(1) note or memorandum) already exist or can lawfully be brought into existence, any failure to supply copies to the surety is essentially technical in nature.  In balancing the parties’ mutual rights and duties in that context, the Ordinance has deemed it sufficient to suspend enforceability “while the default continues” rather than to invalidate the security altogether.  Similar consequences are prescribed in relation to defaults under ss 19 and 20(2).

Conclusion

22.  It follows that the fact that the appellant was in breach of s 20(1)(c) does not mean that it has been permanently deprived of its security.  Such a default is curable and if, as a matter of fact, it was cured by the eventual delivery of a s 20(1)(c) statement (as has been assumed for present purposes), suspension of the appellant’s entitlement to enforce its security will have come to an end.  In the circumstances, the Court of Appeal’s decision striking out the appellant’s claim to enforce its security and dismissing its action against the respondents must be set aside and the action re-instated.