CELESTIAL FINANCE LTD. v. YU MAN HON AND OTHERS

HCA4044/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4044 OF 2001

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REASONS FOR RULING

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1. The 2nd and 3rd defendants appealed against the decision of Master Shum on 23 October 2002 dismissing their summons filed on the 18 June 2002 to strike out paragraphs 5, 6, 7, 9, 10 and 11 of the Amended Statement of Claim as frivolous, vexatious and an abuse of process of the court, and to dismiss the action against the 2nd and 3rd defendants with costs.

2. At the hearing before the Master, counsel for the 2nd and 3rd defendants applied orally to have a question of construction of section 20 of the Money Lenders Ordinance, Cap.163 ("the Ordinance") to be determined under Order 14A of the Rules of the High Court. The Master declined to do so. The Notice of Appeal did not include this ruling of the Master. Initially, Mr Grossman SC for the 2nd and 3rd defendants sought to argue this point on the appeal. No question of law has been framed or recorded by the Master, and junior counsel differed in their recollections as to what question of law was argued before the Master. Apparently, the Master declined the discretion on the basis that the 2nd and 3rd defendants had sought to set aside the security given by them by reason of misrepresentation on the part of the plaintiff. Eventually, Mr Grossman abandoned this point and confined the appeal on the striking out point.

3. I have dismissed the appeal by the 2nd and 3rd defendants and I now give my reasons as follows.

The background

4. For the purpose of the appeal, the facts are as follows. The plaintiff is a licensed money lender and it provides securities margin finance. The 1st defendant is the principal debtor. The 2nd and 3rd defendants are sureties who have executed a mortgage and a guarantee both dated 30 September 1997. On 26 November 2002, the plaintiff obtained judgment against the 1st defendant in the sum of $29,494,276.48 with interest.

5. The 2nd and 3rd defendants complained that the plaintiff failed to comply with section 20(1) of the Ordinance within seven days after the making of the loan agreement, and were debarred from suing on the security.

Money Lenders Ordinance

6. Section 20 of the Ordinance provides 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."

7. And section 18 of the Ordinance provides as follows :

"(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 (Amended 69 of 1988 s. 15)

(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 2nd and 3rd defendants' argument

8. The 2nd and 3rd defendants' case is that the plaintiff has failed to comply with section 20 (1)(a) to (1)(c). There is a factual dispute as to whether section 20(1)(b) has been complied with, and for the present purpose, Mr Grossman did not rely on this subsection. Further, for the present purpose, Mr Grossman conceded that it is arguable that the failure to comply with section 20(1)(a) is subject to the court's discretion under section 18(3), and he did not rely on this subsection as well.

9. It is common ground that on 22 May 2002, the plaintiff supplied a statement to the 2nd and 3rd defendants which in substance satisfied the requirements of section 20(1)(c). However, Mr Grossman submitted that it was fatal that the statement was given four years after but not within seven days after the making of the loan agreement, and hence, the plaintiff could never enforce the security. In the skeleton submissions, Mr Grossman queried whether the information was furnished pursuant to section 20(2) and not section 20(1)(c). For the present purpose, he only relied on the point as to time. There is no allegation of other unscrupulous practice.

10. Mr Grossman submitted that the words in section 20(1) are clear and unambiguous : "the money lender ... shall within 7 days after the making of the agreement give to the surety" the statement. The word "shall" means the obligation is mandatory and full effect should be given to it. It was submitted that the words "while the default continues" in section 20(4) only relate to the failure to furnish the statement from time to time under section 20(2), but not to section 20(1). The obligation in section 20(1) is not to be read down with reference to section 20(4), otherwise, it is to render the words "within 7 days after the making of the agreement" pro non scripto or as if they were not written. It is not permissible to ignore the plain and obvious words of the legislation.

11. Mr Grossman submitted that a literal approach should be adopted in the construction of section 20(1). He referred to F v. F [1970] 1 All ER 200, per Sir Jocelyn Simon P at 204g-h :

"It is trite law that it is the duty of the court, in construing a statute, to ascertain and implement the intention of Parliament as expressed therein. Where Parliament has used in non-technical legislation words which, in their ordinary meaning, cover the situation before the court, the court will in general apply them literally, provided no injustice or absurdity results."

12. It was submitted that to render the security unenforceable would not lead to any unfairness or absurdity. It was the clear intention of the legislature that surety should be accorded additional protection over and above the borrower, as the loan was made to the borrower and the surety obtained no benefit from the transaction. After all, the money lender could always have resort to the borrower for repayment.

13. Mr Grossman referred to the speech of the Attorney-General in the Legislative Council on 28 May 1980 on the second reading of the Money Lenders Bill 1980. However, those comments were so general that they do not add to the construction of section 20(4).

The plaintiff's argument

14. Mr McCoy SC for the plaintiff submitted the words "while the default continues" in section 20(4) relate to both section 20(1) as well as section 20(2). It means a postponement of enforcement of the security while the default continues, and the postponement will be lifted after the default has ceased. Such a construction will not render the words "shall within 7 days after the making of the agreement" in section 20(1) redundant as they stipulate there shall not be default within the seven days and the default shall commence from the eighth day. To hold otherwise would lead to absurdity as a mere technical breach of say, by one day, would make the security unenforceable.

15. Mr McCoy also pointed out that the words "while the default continues" are placed between two commas, and is meant to refer to the entire phrase before them, i.e. both section 20(1) or section 20(2). He submitted that to give effect only to the words "shall within 7 days after the making of the agreement" is to render the words "while the default continues" as if they were not written.

The legal principles of striking out

16. The principle that the court should only strike out pleadings in plain and obvious cases is spelt out in Ha Francesca v. Tsai Kut Kan [1982] 1 HKC 382 (CA), per Silke JA (as he then was) at 392g-h,

"My attention has been directed by counsel to the principles upon which the court acts on striking out applications. If I may encapsulate them, striking out should only be done in plain and obvious cases, there should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. The claim must be obviously unsustainable, the pleadings arguably bad and it is impossible, not just improbable, for the case to succeed before a court will strike out. If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law in proceedings such as this."

17. In Yue Xiu Finance Co Ltd v. Agnew [1996] 2 HKC 122 (CA), Litton VP (as he then was) said at 127a-c :

"What the defendants were seeking to do, by their summons, was in effect to drive the plaintiff from the judgment seat. This is a drastic remedy and it follows that no court should give effect to it unless it is satisfied that the legal basis of the claim is unarguable or almost inconsistently bad; and, as Sir Thomas Bingham MR remarked in E (a minor) v. Dorset County Council [1994] 3 WLR 853 at 865, where the legal viability of the cause of action is sensitive to the facts, an order to strike out should not be made."

Section 20(4)

18. I have been referred to some authorities touching upon section 20(1) but they are not conclusive on the matter.

19. In Yelsen Finance Holdings Limited v. Chan Mei Suen, CACV170/99, the debtor defaulted under the loan agreement and the plaintiff called upon the defendant to make good the terms of the guarantee. The defendant received a copy of the guarantee and agreement subsequent to the commencement of the proceedings. One issue was whether the plaintiff provided copies of the agreement and guarantee in accordance with section 20(1). Mayo VP (as he then was) found that the section 20(1) point was redundant as it was not inequitable for he judge to decline to enforce the agreement by reason of non-compliance of section 18(1).

20. In Orix Asia Limited v. Grant Forward Industrial Ltd & Ors, HCCL79/1999, per Waung J, the plaintiff applied for summary judgment and the defendant guarantors submitted that there had been a non-compliance with section 20(1) in failing to give certain documentation with seven days after the making of the agreement. Unconditional leave to defend was given.

21. Both parties have tried to persuade me that the other's argument is bound to fail. It is noted that while there are two commas in the English text of section 20(4), there are three commas in the Chinese text, an extra comma between the reference to section 20(1) and section 20(2). The authentic texts of the Ordinance in both official languages prima facie enjoy equal status. Counsel for both parties have not fully addressed me on such a point, save that they agree the construction of one text may shed light on the other. It was also at this juncture that Mr Grossman abandoned the Order 14A point.

22. For the present purpose, I am not satisfied that the plaintiff is bound to fail so as to be driven from the judgment seat. Hence, the 2nd and 3rd defendants' appeal is dismissed.

Costs

23. The plaintiff asked for costs on the indemnity basis under the express provisions of the mortgage and the guarantee. As the 2nd and 3rd defendants have sought to set aside those documents on the ground of misrepresentation, I have ordered costs to be reserved. I have granted leave to the plaintiff to appeal on costs.

Remarks: