New Japan Securities International (H.K.) Ltd. v. Lim Yiong Lin

HCA001466/1983

1983, No. 1466

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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1984, No. 704

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Deputy Judge Barnett in Court

Date of Hearing: 29th and .30th September, 1st October 1936

Date of Delivery of Judgment:  2nd October 1986

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JUDGMENT

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1. I am concerned with two actions and they both arise out of the loan of money by the Plaintiff to the Defendant, albeit in differing circumstances. The first action (that is 1466 of 1983) concerns straight-forward loans of money. Between January and July 1982 the Plaintiff made to the Defendant six loans totalling some 220 million Yen. Each of the loans was for a period of three months at a rate of interest ranging from 7.25% to 7.375%. The first five of those loans was each rolled over, that is the expression used by the parties, on one or more occasions. The sixth loan for some 10 million Yen was not rolled over. In December 1982 the Plaintiff sought repayment of the money which it had lent to the Defendant. The money was not forthcoming. For some 12 months, there was some desultory correspondence between the parties which concluded in February 1984. Various proposals were made by or on behalf of the Defendant, but they came to nothing and subsequently the Plaintiff commenced these proceedings.

2. The Plaintiff is a licensed money lender, but it is conceded on behalf of the Plaintiff that in making these loans, the six loans to the Defendant, the Plaintiff did not comply with the requirements of subsections 1 and 2 of Section 18 of the Money Lenders Ordinance. (I shall not, in view of the time, re-read those sections; we are familiar with them. ) However, the Plaintiff relies on subsection 3 of Section 18 of the Ordinance and asks the Court to exercise its discretion in favour of the Plaintiff and rule that the loans, notwithstanding the non-compliance with the requirements of Section 18, should be enforced.

3. The Defendant for his part did not dispute that he had the money. As far as the first five loans, those loans which were rolled over, are concerned, the Defendant relies upon paragraphs (a) and (c) of Section 22 of the Money Lenders Ordinance and maintains that the loans were illegal; and that in any event the Court should not exercise its discretion in favour of the Plaintiff. I can dispose of the argument in respect of paragraph (c) of Section 22 quite shortly. I shall not read it. It has been read by Counsel and I think it is fresh in our memories.

4. Two witnesses gave evidence on behalf of the Plaintiff, and the evidence of these witnesses was not contradicted by the Defendant for whom no evidence was called. I am bound to say that I found both those witnesses honest and truthful, and I accept what they say about the rate of interest which was increased, albeit by a very small amount. On each occasion that the first five loans were rolled over, they say that they were not seeking to impose upon the Defendant but rather putting up the rate simply to reflect the Plaintiff's own increased cost of borrowing the funds which it subsequently loaned to the Defendant.

5. In the other action, that is 704 of 1984 to which I shall refer in a moment, money was loaned to the Defendant by the Plaintiff in respect of a margin account in connection with stock broking activities. Again, the rate of interest charged on the margin account, on the evidence before me, as Mr. Ramanathan points out, is based largely upon the cost of funds, and it is pointed out that during the period of January to August 1982, during which the loans were made and rolled over, the margin rate of interest did not shift. And this, it is contended, suggests that there was no increase in the cost of funds during the period, that consequently there was no need for the rate of interest on the rolled over loans to be increased, and the only inference that can be drawn is that the Plaintiff was seeking to inflict a penalty upon the Defendant for non-payment.

6. However, I accept the evidence of the second witness, that is Mr. Aoki. His explanation is that the Japanese brokers in Hong Kong, who fix the margin rate between themselves, do their best to keep that rate constant and avoid too many fluctuations. I found this explanation to be clarification of the position and not giving rise to suspicion. In all the circumstances, I find that the Plaintiff was not seeking to impose a penalty upon the Defendant, and the question of illegality under paragraph (c) accordingly does not arise.

7. Paragraph (a) of Section 22 makes a loan illegal if the agreement directly or indirectly provides for compound interest. I think it would be helpful if I refer to the way which the loans were rolled over.

8. On page 14 of the bundle, we have the first roll over of the first loan. This is in a letter dated the 19th April 1982, and I think it would be helpful if I read the parts which relate to the first loan. So the letter, which is from the Plaintiff to the Defendant, reads:

"Dear Mr. Lim,

Re Yen 50 Million Loan Proceed Matured in April 14, 1982

As per your instruction dated April 16, 1982 we have duly rolled over the above-mentioned loan amounts with interest plused as follows:-

Principal Amount  :     ¥50,916,319

Maturity Date         :    April 15, 1982 to July 15, 1982

Interest Rate          :    at 7.3755%"

and then the letter goes on to refer to the second one.

9. Page 24 of the bundle, there is a similar letter from the Plaintiff to the Defendant upon the second roll over of the first loan. Similar terms are used, and again we find that the principal amount has the interest added, and that is to mature in a further 3 months at a slightly higher rate of interest; and then finally on page 30, in similar terms, the first loan was once again rolled over for 3 months. Once again the interest for the previous 3 months is added to the principal, and that becomes the loan for the final 3 months. It is the evidence, which I accept, that the roll overs of all the loans, not just the first loan, were made at the request of the Defendant.

10. It is Mr. Ramanathan's contention for the Defendant that these roll ovens, extensions (call them what you will), offend because the loans were simply extended with the accumulated interest added each time to the principal amount, and the new rate, slightly higher rate of interest, was charged on the total. And that, he says, is a clear compound element and must be illegal.

11. For the Plaintiff, Mr. Tang first says there is no provision anywhere for compound interest. For that, of course, is true. There is no direct provision for compound interest. But he then proceeds to say that in fact these were new loans, that the earlier loan, together with the interest, had been wiped out, and that therefore there was no question of compound interest being charged. And for this assertion, he relies principally on the English case of B. S. Lyle Limited v. Chappell. ⁽¹⁾ Of course, the question to be decided by the Court of Appeal in the Lyle case was whether there was a sufficient memorandum for Section 6 of the Money Lenders Act of 1927(and to all intents and purposes that section is the same as section 18 with which we are now dealing). And on the special facts of that case, which are wholly distinguishable, in my view, from the present case, the Court of Appeal found that there was a sufficient memorandum. Documents passed between the parties, and there was evidence of an oral agreement between them. However, I must refer to the judgment of Lord Justice Scrutton, and I take up his judgment at the bottom of page 699. He said: -

"The money lenders were in this difficulty. First they or their legal advisors took the view that there could not be a legal memorandum of a renewal of the loan on altered terms because the act required a memorandum before the money was lent or the security given which they read as referring to the original loan or security and not to the terms substituted later ... As to the first point, I find it difficult to believe the Parliament intended to render renewals of loans or the securities for them on altered terms impossible by requiring that a memorandum of the alteration should be signed before the original loan was made. In my opinion, when the time for payment of the original loan has expired, without complete repayment, and the time for repayment is extended or altered, there is a fresh loan and it is sufficient if the memorandum of the altered terms precedes the commencement of the extended period. The draftsmanship of Section 6 might be better, but I cannot think Parliament intended to render renewals impossible. "

12. If Mr. Ramanathan's contention is correct, that there was a simple extension of the existing loan, it seems to me that clear words would be required along the lines simply that the original principal would not be called in for a further 3 months, or whatever the period of the extension is to be, and that interest would continue to accrue thereon at the same rate or at least if there was to be a new rate of interest, it would apply to the principal only and from the date upon which the new rate comes into force. But we have none of that here. In the letters to which I have referred, there is a deliberate accumulation of the interest over the previous period of the loan. This is added to the outstanding principal, and it is expressed to be continued for a further 3 months at a new rate of interest. Bearing the wording of the letters in mind, and with the authority of the Lyle case, it seems to me that the only and true interpretation of the roll over letters must be that sufficient funds had been advanced by the Plaintiff to the Defendant to pay off the old loan together with interest so that the Defendant was discharged of all obligations under the old loan and then assumed new obligations in respect of the advance. I find therefore that the five loans on each occasion they were rolled over became new loans.

13. That, I am afraid, does not help Mr. Tang because Lyle is not an authority for saying that there is no compound interest in such circumstances, because it will be recalled in the last paragraph of his judgment, that is on page 702, Lord Justice Scrutton said: -

"The case must go back for a new trial in which the effect of the two prima facie harsh rates of interest 240% and 85% will have to be considered, and the question of compound interest investigated. "

14. It seems to me in the present case to be flying in the face of reality to say that indirectly no compound interest is being levied by the rolled over loans. However viewed, there is an element in the new or the rolled over loans of interest accrued but unpaid, and it seems to me to defy common sense to say that is not compound interest. That being so, the first five loans cannot be but illegal pursuant to Section 22 of the Money Lenders Ordinance. As they are illegal, they are unenforceable and there is no discretion in the Court to amend or vary them so as to make at least the principal and possibly some interest recoverable.

15. I make that point because it seems to me that the Defendant's case is wholly unmeritorious, and it may well be that the legislature should look at Section 22 to see whether a discretion such as occurs in Section 18 should be reposed in the Court. I would like to make it plain, when I say the Defendant's case is wholly unmeritorious, I am not making any criticism whatsoever Mr. Ramanathan who was taken a perfectly valid point which is available to him, argued that very ably and succeeded.

16. We are, however, left with the sixth loan, in respect, of which there is no question of compound interest because it was not rolled over, and I have to decide whether or not I should exercise my discretion in favour of the Plaintiff pursuant to subsection 3 of Section 18. Mr. Ramanathan, very rightly in my view, conceded that there was no particular reason which he could advance why the Court should not exercise its discretion so I hope I can be forgiven if I do not rehearse his arguments fully. I was referred to the Hong Kong case of Brother's Company v Ah Puk Transportation.⁽²⁾ That was a case decided earlier this year by Mayo J. and he dealt with the matters which a Court must consider when deciding whether or not to exercise its discretion in favour of the Plaintiff, the money lender. He reviewed authorities, mainly New Zealand authority, in particular the case of Adams and another v. Paul's Properties where he cited with approval the decision of Mr. Justice Woodhouse. What Mr. Justice Woodhouse said appears on page 8 of the decision, and I pick it up in the last sentence. He said: -

"I think that the circumstances to be taken into account should include such matters as the relative status of the parties, the nature and extent of the default, the way in which it arose, the implications for the borrower, and the attitude of the lender and the general appearance of the contract throughout. "

And Mr. Justice Mayo then went on to say: -

"With respect it seems to me that Woodhouse, J. has adopted a very sensible approach."

He then made reference to an unreported Hong Kong case in which Deputy Judge Nazareth also adopted a liberal approach to the exercise of the discretion and considered a wide range of circumstances.

17. In this case, the circumstances which I take into account are the fact that there was no prejudice to the Defendant. The Defendant was a man of considerable standing and knowledge in financial and economical circles in Hong Kong. He was Chairman of a publicly listed company and was a director of another Japanese firm dealing in securities. There was some attempt by the Plaintiff to comply with the provisions of the Money Lenders Ordinance. Mr. Chan, the first witness for the Plaintiff, said he knew that there were some formalities, he made some enquiries of a colleague in a finance company and obtained certain forms which were filled in but which were discovered to be wholly inadequate. Finally, there was a most modest rate of interest charged to the Defendant. Taking these factors into account, I exercise my discretion in favour of the Plaintiff and indeed, if it had been appropriate to do so, I would have exercised my discretion in respect of the other five loans as well; and I say that in case the matter goes further. So in the first case, there will be judgment for the Plaintiff in respect of the sixth loan.

18. The second case is action No. 704 of 1984, and this arises out of the stock broking activities of the Plaintiff. Between May 1981 and January 1983, the Plaintiff, pursuant to an agreement with the Defendant, bought and sold shares for the Defendant, and to facilitate the purchase of those shares, the Plaintiff advanced money on a margin account for the Defendant against the security of shares deposited by the Defendant with the Plaintiff, some 6 million shares in Heng Sang Industries which are now worthless. At the end of the day, when the Plaintiff ceased trading for the Defendant, the Defendant owed the Plaintiff some ¥7.8 million, and that amount I think is not disputed. Now it is conceded on behalf of the Plaintiff that the loans which were made to the Defendant on the margin account are loans within the meaning of the Money Lenders Ordinance. But it is contended that these loans were exempted from the provisions of Section 18 and indeed from the Ordinance by virtue of paragraph 5 of Part II of the First Schedule to the Ordinance (and I will not, to save time, read that through).

19. I have considered the various points which have been made by Mr. Ramanathan for the Defendant. First of all, there is no evidence, as was pleaded in paragraph 1 of the Amended Statement of Claim, that the Plaintiff was a registered dealer in securities. Secondly, that the Plaintiff applied for a money lender's licence, on the Plaintiff's own evidence, to regularize past and future transactions. And of course, Mr. Aoki, the second witness, thought that it was necessary, and Mr. Ramanathan rightly says that the Plaintiff's thinking is material. Next, it was evidence that if there was a higher interest rate on the margin accounts, there is more profit to the Plaintiff. Again that was the evidence of PW2, Mr. Aoki. And finally that, unlike the two cases which Mr. Tang relies upon, that is the Hong Kong case Harvester Stock Investment Company v Kwan Siu May⁽³⁾ and the Privy Council case of the Official Assignee of the Property of Koh Her Khoon,⁽⁴⁾ unlike those cases, the Plaintiff in this case is or was a registered money lender.

20. As I say, I take all those points into account but even without the authority of Harvester, I have no hesitation in saying on the evidence that the primary business of the Plaintiff was stock broking and that the loans to the Defendant and to other clients on the margin account were made in the ordinary course of that business. And I am fortified in coming to that conclusion by the Harvester case because that also involved stock broking and the running of a margin account, albeit that it involved Hong Kong rather than Japanese shares. So I am satisfied and I so find that those loans are exempted and there must be judgment for the Plaintiff for the sum claimed.

(1) [1932] 1 KB 601

(2) H.C.A. 1985 No. A3418

(3) H.C. A. 1983 No. 11515

(4) [1960] A.C. 178

Representation:

Mr. Robert Tang, Q.C. & Mr. Haney Fan instructed by Messrs P.H. SIN & Co. for the Plaintiff.

Mr. Kumar Ramanathan instructed by Messrs Cheung, Tong & Rosa for the Defendant.