Strong Offer Investment Ltd (in Liquidation) v. Nyeu Ting Chuang

FACV No. 21 of 2006

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 21 OF 2006 (CIVIL)

(ON APPEAL FROM CACV NO. 384 OF 2004)

____________________

Between

____________________

Court: Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Mortimer NPJ and Lord Scott of Foscote NPJ

Hearing and Decision: 13 March 2007

Handing Down of Reasons: 30 March 2007

____________________

J U D G M E N T

____________________

Mr Justice Bokhary PJ:

1.At the conclusion of the hearing, we announced that, for reasons to be handed down in due course, the appeal was dismissed subject to a declaration that any element of compound interest in the judgment debt must be removed and the judgment debt reduced accordingly. At the same time, we directed as follows. If the parties are able to agree the correct figure of the judgment debt pursuant to such declaration, they have liberty to apply in writing to a single judge of this Court for the entry of judgment accordingly. But if the parties are unable to agree that figure within two months of today, they have liberty to apply to a single judge of the High Court for him or her to determine such figure which will be reported to this Court for the entry of judgment accordingly.

2.We then heard the parties on costs. Having done so, we informed the parties that costs will be dealt with in the judgment containing our reasons for the result which we had announced. We now hand down our reasons as to which I agree with the judgment of Mr Justice Chan PJ and with what Mr Justice Ribeiro PJ has added.

Mr Justice Chan PJ:

3.This is an appeal against the decision of the Court of Appeal (Woo VP, Yeung and Yuen JJA) upholding Chung J who gave judgment for the respondent (“Strong Offer”), the plaintiff in this case, against the appellant (“Mr Nyeu”), the defendant in this case, in the sum of $41,220,569.84 together with interest and costs. This amount arose out of the loans advanced by Strong Offer to Mr Nyeu under two margin finance accounts (“the margin accounts”) to enable Mr Nyeu to trade in securities on margin and represented the outstanding indebtedness after the liquidation of the margin accounts by Strong Offer and the sale of the securities pledged by Mr Nyeu to secure the loans so advanced.

4.The present appeal concerns two main issues: first, whether the court should exercise its discretion under s.18(3) of the Money Lenders Ordinance, Cap 163 (“the Ordinance”) to enforce the loan agreement made between the parties which had admittedly contravened the provisions of the Ordinance; and second, whether Strong Offer was under a duty to mitigate its loss and if so, whether it was in breach of such duty by liquidating the margin accounts in December 1998 and not earlier.

The facts

5.Both Strong Offer and one Okachi Investment (HK) Company Ltd (“Okachi HK”) were Hong Kong companies which were the subsidiaries of Okachi & Company Ltd, a company incorporated in Japan. Strong Offer was a licensed money lender and Okachi HK a licensed stockbroker under the relevant statutes in Hong Kong. Mr Nyeu, a highly educated person, was resident in Taiwan where he was a school principal and held prestigious positions, especially in the education sector.

6.Mr Nyeu was introduced to Strong Offer and Okachi HK by his friend, Mr Fan. Starting from May 1995, Okachi HK provided Mr Nyeu with facilities for securities trading on margin and Strong Offer provided him with funding in such trading by way of loans. To facilitate such trading and funding, two share accounts were opened with Okachi HK and the two margin accounts (Nos. M3001 and M3480) were opened with Strong Offer in May 1995 and November 1996 respectively. The share accounts were governed by a Cash Client’s Agreement signed with Okachi HK and the margin accounts were governed by a General Commercial Agreement and Memorandum of Deposit with Strong Offer (“the loan agreement”) both dated 10 May 1995. Since Mr Nyeu was not in Hong Kong most of the time, he instructed an account executive of Okachi HK, a Mr Ying Chau Fung (“Mr Ying”) to buy and sell on his behalf and operate the shares accounts and the margin accounts for him. Reports containing details of the securities purchased and sold and the prices at which they were transacted were faxed to Mr Nyeu almost on a daily basis and certainly very shortly after the relevant transactions were carried out. All the bought and sold notes and the statements of these accounts were also sent to him at the end of each month.

7.It is common ground that the arrangements for the margin trading and the funding thereof were as follows:

(1) when a purchase of securities was made on behalf of Mr Nyeu, Okachi HK drew funds from the margin accounts to settle the purchase;

(2) the purchase was recorded in the share accounts and the withdrawal of funds was recorded as a debit in the margin accounts;

(3) the securities purchased were pledged as security for the indebtedness under the margin accounts;

(4) the total indebtedness standing in the margin accounts represented the amount of loans advanced by Strong Offer to Mr Nyeu;

(5) when securities were sold on behalf of Mr Nyeu, Okachi HK delivered those securities to the Stock Exchange for settlement and the proceeds of sale were paid into the margin accounts to reduce the indebtedness;

(6) records of the purchases and sales were faxed and monthly statements sent to Mr Nyeu as mentioned in the preceding paragraph; and

(7)              when the indebtedness standing in the margin accounts exceeded the market value of the securities pledged, Mr Nyeu was required to pay a deposit to maintain the margin at a certain level.

8.As a result of the stock market crash in October 1997, the market value of the securities held as security for the loans advanced under the margin accounts dropped drastically. Various margin calls were made by Strong Offer to Mr Nyeu, threatening that if Mr Nyeu should fail to make sufficient margin deposits, the margin accounts would be liquidated and Strong Offer would sell the securities to set off the outstanding indebtedness.

9.Initially Mr Nyeu asked for indulgence and requested Strong Offer not to liquidate the margin accounts or to sell the securities. A total of about $2.5 million was paid as further margin deposits during the period between February and April 1998.  As no further deposit was thereafter made, Strong Offer decided to liquidate the margin accounts which it did at the end of December 1998 and the securities were sold at the then market prices. The total outstanding indebtedness after the liquidation and sale stood at $41 million which was the amount claimed by Strong Offer.

Judgments in the courts below

10.At the trial, Mr Nyeu raised several defences. Only those which are relevant to the main issues in this appeal will be discussed in this judgment. The others are no longer pursued.

11.In giving judgment for Strong Offer, the judge made a number of findings. First, he held, contrary to Mr Nyeu’s argument, that the contractual documents signed by Mr Nyeu constituted the note or memorandum required by s.18(1) of the Ordinance.

12.Secondly, the judge further held that Strong Offer was in breach of the following provisions of s.18(2) of the Ordinance:

(1) s.18(2)(d), in that the amount of the principal of the loan in words and figures was not stated in those contractual documents;

(2) s.18(2)(f), in that the date of the making of the loan was not stated;

(3) s.18(2)(i), in that the rate of interest charged on the loan was not expressed as a rate per cent per annum, or that the rate per cent per annum was not calculated in accordance with Schedule 2 to the Ordinance; and

(4) s.18(2)(j), in that there was no declaration as to the place of negotiation and completion of the agreement for the loan.

13.Thirdly, the judge considered that these breaches were technical and had caused no prejudice to Mr Nyeu. Exercising the discretion under s.18(3), the judge ordered the enforcement of the loan agreement.

14.Finally, the judge took the view that Strong Offer had not failed to mitigate its loss and not acted unreasonably in deciding to liquidate the margin accounts at the end of December 1998 and not earlier. The judge also remarked that if necessary, he would have found that Strong Offer had a right (as opposed to a duty) under clauses 5, 7 and 8 of the loan agreement to liquidate the margin accounts.

15.The Court of Appeal upheld the judge’s conclusions in respect of the first and third points and refused to interfere with the judge’s exercise of discretion pursuant to s.18(3). There was no challenge to the findings on the second point. In respect of the fourth point, the Court of Appeal considered itself bound by the decision in Richardson Greenshields of Canada (Pacific) Limited v Chou Tai Chuan Cecilia (CACV 130 of 1990, June 7 1991, unreported, “the Richardson Greenshields case”) and held that there was no duty to mitigate on the part of Strong Offer and that in any event, there was on the facts of this case, no breach of any such duty, even if it existed, and that it was not unreasonable to liquidate the margin accounts only in December 1998.

16.Against these conclusions, Mr Nyeu now appeals to this Court.

S.18 - striking a balance between money lender and borrower

17.One of the principal objects of the Ordinance is to control and regulate money-lending transactions and to provide protection and relief against excessive interest rates and extortionate stipulations in respect of loans.

18.Section 18 offers one of the key protections to uneducated, ignorant and unsophisticated borrowers who may not be aware of all the terms and conditions under which the loans are made to them. It seeks to impose certain requirements the compliance with which is a pre-requisite to the enforcement of the loan agreement against the borrower. Section 18(1) provides that no agreement and no security shall be enforceable unless the following conditions are satisfied: (1) there must be a note or memorandum of the agreement in writing; (2) the note or memorandum must contain all the terms as required under s.18(2); (3) the note or memorandum must have been signed personally by the borrower; (4) the borrower must have been given a copy of the note or memorandum including a summary of the prescribed provisions of the Ordinance at the time of signing; and (5) the note or memorandum must have been signed before money was lent or the security was given. (See also Emperor Finance Ltd v La Belle Fashions Ltd & Others (2003) 6 HKCFAR 402 (“the Emperor Finance case”), per Ribeiro PJ at para. 70.) These conditions are imposed to ensure that a borrower is fully aware of and freely agrees to all the terms and conditions of the loan, and in particular knows exactly how much money he has borrowed and what interest he has to pay.

19.On the other hand, the statute is not intended to stifle genuine money-lending transactions or to let the money lender lose all the money he has lent out and all the security he has because of a failure to comply with all such requirements, however trivial or unintentional the breach may be. Hence, where it is not inequitable to do so, the court would enforce the loan agreement with suitable variations, modifications and exceptions. This is the discretion given to the court by s.18(3).

20.In resolving any dispute between the money lender and the borrower, therefore, there should be no pre-conceptions either in favour of or against the money lender or the borrower. The statute has sought to strike a fair balance between the two parties. In applying the provisions of s.18, the court has to bear in mind, among other things, the parties’ respective rights and obligations under the statute as well as the agreement made by them. See Ribeiro PJ in Celestial Finance Ltd v Yu Man Hon & others (2004) 7 HKCFAR 450 at para. 21.

Whether any note or memorandum

21.One of the points raised in the courts below was whether the contractual documents in this case could be taken together to constitute a note or memorandum which satisfied the requirements of s.18(1). This point was raised in this Court not as a separate ground of appeal but in support of the contention that the court should not have exercised its discretion in enforcing the loan agreement. This is a point which was deliberately left open in the Emperor Finance case, by Ribeiro PJ who said at para. 100:

“100. … I ought to state parenthetically that since no argument was addressed concerning any possible difficulties flowing from the fact that the contract was contained in separate documents, that issue is ignored in this judgment. This should not be taken to suggest that such a practice is necessarily valid for the purposes of the Money Lenders Ordinance.”

22.Mr Russell Coleman SC, for Mr Nyeu, argued that s.18(1) does not allow several documents to be looked at together as forming one note or memorandum and that there was no single note or memorandum in the present case which answered the statutory description.  He submitted that it is envisaged by the legislature that there is one note or memorandum in which all the information can be found and that the requirements of the section are not met by a document which contains only most but not all of the necessary information regarding the loan; nor by having all the information contained in several documents.

23.With respect, this argument cannot be sustained. It is not supported by the wording of the section. Construed in its context, s.18 does not and is not intended to refer to only one single document by the words “a note or memorandum in writing of the agreement”. A loan agreement may be made orally or in writing, or partly orally and partly in writing. All that s.18 requires is that there must be something in writing so that the borrower can know all the terms and conditions of the loan. It matters not whether they are contained in one document or more than one document. If a contract contains all the terms and conditions of the loan, as is usually the case, it is as good as anything and clearly meets the requirements of the section. It would be absurd to ask for another note or memorandum to set out all the terms and conditions again just to satisfy the requirements. Such construction is inconsistent with the letter and spirit of s.18.

24.Counsel’s argument is also contrary to the decision in Holiday Credit Ltd v Erol [1977] 1 WLR 704 which was a case which dealt with s.6 of the Moneylenders Act 1927 the relevant part of which is similar to our s.18. One of the issues there was whether the necessary note or memorandum contained all the terms of the contract.  The House of Lords held that this statutory requirement was satisfied by considering all the documents together which were described as “a composite document”.  At p.709, Lord Morris of Borth-y-Gest said:

“In my view there may be a ‘note or memorandum’ which is capable of satisfying the requirements of section 6 if documents are so conjoined as to comprise a composite memorandum.  … There was accordingly in my view one composite document which contained various terms: reference to such terms could readily be made.”

25.In my view, the judge and the Court of Appeal were clearly right in rejecting Mr Nyeu’s argument.

Non-compliance in the present case

26.There was admittedly a failure on the part of Strong Offer to comply with some of the requirements of s.18(1) and (2). The judge identified four (as set out in paragraph 12 above). They flowed from the nature and the modus operandi of the money-lending transactions in the present case.

27.Looking at the statutory requirements, it is immediately apparent that money lending transactions to finance margin trading must find compliance difficult if not impossible. In such a situation, as in the present case, money is lent, repayment is made and interest is charged on a continuous basis by way of credit and debit entries in the account statements. But as discussed in the Emperor Finance case, in para. 95, 104 and 105, the granting of each credit constitutes a separate loan and requires the compliance of s.18(1) and (2), including the execution of a fresh note or memorandum personally signed by the borrower before the credit is given. Apart from the fact that this is impracticable and almost impossible to achieve, neither the money lender nor the borrower (who needs this facility for trading in securities on margin) would want to see this happen. Yet the statute clearly requires strict compliance by the money lender or he has to face the consequence of having the loan agreement unenforceable unless the court exercises its discretion under s.18(3) in his favour.

28.No doubt at the time of the relevant transactions, s.18 imposed a considerable constraint on a money lender in providing advances to facilitate margin trading as part of his business, although after the amendment to the Ordinance in 2002, a money lender which secures registration under Part V of the Securities and Futures Ordinance, Cap 571 is now exempt from the s.18 requirements. On the other hand, as Mr Coleman rightly pointed out, a money lender, like Strong Offer, which chooses to conduct money lending transactions in such a way, can always apply for specific exemption under s.33B of the Ordinance.

Exercise of discretion under s.18(3)

29.It was accepted by the parties that the proper approach to the exercise of discretion under s.18(3) was that discussed in the Emperor Finance case, per Ribeiro PJ:

“119. In exercising its discretion, the court should examine the breach or breaches in question, their consequences for the parties to the transactions and any other circumstances which may make it inequitable to hold the agreements unenforceable.”

30.It was also expressly accepted by Mr Coleman that the Emperor Finance case established that the s.18(3) discretion can, in a suitable case, be exercised so as to validate a running account lending such as that conducted by Strong Offer for Mr Nyeu’s margin trading.

31.The first main ground of appeal was that the lower courts were wrong to exercise the discretion in ordering the enforcement of the loan agreement. It was said that failure to comply with the requirements of s.18 immediately rendered the loan agreement unenforceable and that the lower courts must be satisfied that there were cogent reasons for exercising the discretion in favour of the money lender; however, the courts had failed to have sufficient regard to the relevant matters.

32.One of the matters which the lower courts were said to have overlooked was that the contractual documents in the present case were pro forma documents and that the irresistible inference was that the non-compliance with the requirements were deliberate and repeated breaches. There is of course nothing wrong in the use of pro forma documents in itself. Apart from money lenders, many companies, including banks or finance companies would make use of such documentation. But the undisputed fact in the present case is that the pro forma documents adopted by Strong Offer did fail to meet some of the requirements of s.18 and the breaches were most probably repeated in relation to other customers. In that sense, at least, the breaches were deliberate, although there was no evidence that the use of such documentation was motivated by an intention to take advantage of Mr Nyeu or unscrupulous or ignorant customers. The fact that there are difficulties for money lenders who do business by providing margin trading facilities to comply with the s.18 requirements does not absolve Strong Offer from the obligation to comply with those requirements or provide any excuse when it has, as in this case, failed to discharge such obligation. And there was no explanation for the absence of any effort made to apply for exemption under s.33B of the Ordinance.

33.All these are valid criticisms. But the matter does not end there. Such breaches do not automatically disentitle Strong Offer from recovering its loans. The court has still to conduct a balancing exercise having regard to the equities in the case and decide whether it would be inequitable not to enforce the loan agreement. The breaches, which were in one sense deliberate and repeated and not merely technical, necessitate an appeal for an exercise of the court’s discretion. In this context, there are two matters which must be taken into consideration. First, Mr Nyeu did not seem to have been prejudiced or affected in any way by these breaches. (I shall deal with the question of prejudice more fully below.) Secondly, there was the 2002 amendment to the Ordinance giving exemption for money lenders which are licensed to conduct business in securities margin financing under Part V of the Securities and Futures Ordinance. While this amendment does not avail Strong Offer in the present case, the fact that the legislature saw fit to grant such an exemption to this type of money lending transactions is clearly also a relevant circumstance which cannot be ignored by the court.

34.Another matter which was relied on by Mr Nyeu was that because of the close relationship between Okachi HK and Strong Offer, a situation was created whereby it was in their interest to make advances to Mr Nyeu to his detriment. It was argued that the more advances were made to Mr Nyeu, the more commission and interest were charged by Okachi HK and Strong Offer respectively and this exposed Mr Nyeu to a greater risk of incurring more losses in trading. This argument is not supported by the evidence. Moreover, this situation arose as a consequence of the arrangements agreed between the parties. Mr Ying was instructed by Mr Nyeu to trade in securities on his behalf and did so submitting reports to him on a regular basis. Mr Nyeu was thus all along fully aware of what was going on. Since such trading commenced in May 1995, no complaint had been received from him that anything improper (apart from the alleged delay in liquidation) had happened arising from such arrangements. There was certainly none when substantial profits (which at one stage apparently exceeded $100 million) resulted.

35.Finally, it was submitted that it was wrong to say that Mr Nyeu had suffered no prejudice as a result of the breaches. Counsel drew our attention in particular to the fact that the failure to specify the rate of interest had permitted Strong Offer to charge compound interest to the detriment of Mr Nyeu.

36.As found by the judge, Strong Offer was in breach of s.18(2)(d), (f), (i) and (j). As I said earlier, these breaches flowed from the special nature and modus operandi of the loan arrangements. For example, there was no fixed amount of the principal of the loan and no limit to the amount of credit which was to be given was specified although this must be restricted by the amount of margin required (s.18(2)(d)); since the loans were advanced on a continuous basis, the date of each loan could not possibly have been stated in the loan agreement in advance (s.18(2)(f)); and no rate of interest was stated in the loan agreement, although it is common ground that interest was charged at 3.5% above the best lending rate. The question is whether Mr Nyeu has suffered any prejudice as a result of these breaches.

37.Apart from the question of compound interest which will be discussed below, it is difficult to see how Mr Nyeu can say he has suffered any prejudice as a result of the breaches on the part of Strong Offer. Mr Nyeu was an educated person and an experienced investor. He needed margin facilities for his securities trading. These facilities were given to him and the arrangements were what he wanted. He must have known how the arrangements would work and what was involved. Such arrangements had worked since May 1995. The absence of any stipulation as to the amount of the principal or on the limit on the principal to be advanced to him could not have caused him any prejudice. This applies equally to the failure to set out the date of each loan in the loan agreement. In any event, he was sent a detailed report after each transaction, including the date, the amount involved and the credit given to him for such trading. The monthly statements also provided him with the updated position in his margin accounts. Neither would the failure to declare the place of negotiation have caused him any concern. 

38.As far as the failure to state in the loan agreement the rate of interest to be charged by Strong Offer is concerned, it is accepted that there was an agreement that it would be 3.5% above the best lending rate. Apart from the question of compound interest which is raised for the first time in this appeal, no complaint was made by Mr Nyeu on the question of interest.

Compound interest

39.In his Speaking Notes submitted a few days before the hearing of this appeal, Mr Coleman drew our attention to the element of compound interest included in the judgment sum awarded against Mr Nyeu. He demonstrated this from the statements of the margin accounts which showed the amounts of interest charged by Strong Offer during the last few months before the liquidation of the margin accounts when there was no trading. This point was not raised as a separate ground of appeal but in support of his contention that contrary to the trial judge’s finding, Mr Nyeu did suffer prejudice as a result of the breach of s.18(2)(i), namely, the failure to set out the correct and permissible rate of interest charged on the loans. And this, counsel submitted, should be taken into consideration in the exercise of the court’s discretion in deciding whether to enforce the loan agreement.

40.This was the first time this point was raised. Mr Coleman (who did not appear at the trial but appeared before the Court of Appeal) could offer no explanation as to why this point was not taken at the trial but admitted apologetically that this point had escaped him and indeed everyone involved in the case, possibly due to the inconspicuous way the interest figures were presented in the monthly statements.

41.Understandably, Mr Paul Shieh SC leading Miss Jane Lo for Strong Offer initially objected to the consideration of this new point and relying on Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356, made two points: first, Strong Offer could have adduced evidence to show that there was a contractual basis for charging compound interest; and second, submissions could have been made for the exercise of the court’s discretion under s.22(2) of the Ordinance to enforce the payment of compound interest. However, after making his submissions and having then re-considered these points, Mr Shieh quite fairly accepted that there was indeed an element of compound interest in the judgment sum awarded in favour of Strong Offer, more likely only during the period between May and December 1998 when there was no trading, but possibly also during the earlier periods when there was still active trading. He also accepted that it would be difficult for him to argue that there was any contractual basis for charging compound interest in this case. Hence, he agreed that even if the appeal was to be dismissed, an adjustment would have to be made after his client had an opportunity to make a more accurate calculation on the figures. That being the position, no decision is called for on these points.

42.However, in view of the submissions made by Mr Shieh on s.22 of the Ordinance, I would like to make the following observations on this provision. This section prohibits, among other things, the charging of compound interest either directly or indirectly and renders a loan agreement which contains such a condition not just unenforceable but also illegal. See s.22(1). Notwithstanding such illegality, the court has a discretion under s.22(2) so that if it is satisfied that in all the circumstances it would be inequitable that the loan agreement should be held unenforceable, it may order that such agreement is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable. Although the wording is similar to that in s.18(3), this discretion serves a different function and provides a different protection to borrowers, namely, from a contractual requirement to pay compound interest.  Insofar as it is sought to argue that the scope of this discretion is wide enough to enable the court to uphold the compound interest, this argument is clearly unsustainable. Under no circumstances would a court of law give effect to such illegal element. This would be against public policy. Nor can this be the intention of the legislation; in fact, it would be contrary to the legislative intent to enforce something which the section itself declares illegal. In my view, the object of the discretion is to allow the money lender to recover the loan together with any amount or rate of interest which is permitted under the provisions of the Ordinance, where the court considers it equitable to make such an order.

43.As Mr Shieh conceded, correctly in our view, there was no contractual requirement to pay compound interest under Clause 12(ii) of or any other provision in the loan agreement. There is thus no question of s.22(1) applying to this case. The exercise of the discretion under s.22(2) simply does not arise.

44.As there was admittedly no contractual basis for charging compound interest in this case, what Strong Offer did, whether since May 1995 or just during the few months before liquidation, did not, in my view flow from the failure to state clearly the rate of interest in the loan agreement. It cannot be said Mr Nyeu has suffered prejudice as a result of that breach.

Court’s discretion confirmed

45.Having considered the breaches in question, the lack of prejudice to Mr Nyeu and other circumstances as discussed above, I take the view that the judge and the Court of Appeal were entitled to exercise their discretion in favour of Strong Offer and order the enforcement of the loan agreement. I see no reason to disagree with their conclusion.

Duty to mitigate?

46.As his second main ground of appeal, Mr Coleman submitted that the Court of Appeal was wrong to hold that Strong Offer was not under any duty to mitigate its loss and that it was not obliged to liquidate the margin accounts and sell the securities within a reasonable time. He equated Strong Offer’s position with that of a mortgagee who has already entered into possession of the security and as such, owed a duty of care to Mr Nyeu and was liable for any damage which might have been caused by its negligence. It was submitted that Strong Offer should have taken steps to sell the shares to reduce its loss within a reasonable time after October 1997 or at least the end of April 1998. In his oral submissions, counsel also referred to possible alternative dates such as 7 January 1998 and 7 July 1998.

47.With respect, the judge and the Court of Appeal were right to hold that there was no duty of care on the part of Strong Offer to mitigate its loss when Mr Nyeu failed to make repayment. First, Strong Offer was claiming repayment of a debt and not damages for breach of contract. The principles of mitigation of loss apply to a claim for damages and have no application to the present claim.

48.Secondly, Strong Offer had a right under the terms of the loan agreement to liquidate the securities pledged to it at any time it might choose. Under Clause 5 (i), it “may without notice sell or dispose of the said securities subject hereto or any part thereof either together or in parcels and either by … public or private sale or in such other manner for such consideration … as [it] may think fit without being in any way responsible for any loss occasioned hereby however arising …”

49.Thirdly, a creditor, in the position of Strong Offer, is entitled to choose when he would liquidate the security in his hands, and if and when he chooses to do so, his only duty is to sell the security at the current market price. This was fully discussed in the Richardson Greenshields case, where Bokhary J (as he then was) giving the judgment of the Court of Appeal said at page 18 of the judgment:

“That case (i.e. China & South Sea Bank v Tan [1990] 1 AC 536) was between creditor and surety, the debtor having defaulted. The Privy Council held that whether, and if so when, to realize the security were questions which the creditor was free to decide, and that his duty to the surety was simply to sell at current market prices if and when he decides to sell. In my view, the distinction between the position of a creditor entitled to realize security and that of brokers entitled to liquidate an under-margin account is too fine for us to hold that such brokers are not free to decide whether, and if so when, to liquidate, or that their duty to the customer is wider than one to sell at current market prices if and when they decide to sell. In my judgment, brokers who are entitled to liquidate a customer’s under-margin account are free to decide if and when to sell the securities or futures held on that account, and their duty to the customer in regard to such liquidation is limited to selling at current market prices as and when they sell if they decide to sell. So I would decide this issue against the customer, who contends that the brokers were under a duty of care to her in regard to when to liquidate. They were not.”

50.Fourthly, even if Strong Offer could be regarded as a mortgagee in possession (which I doubt), it was not subject to the duty of care as submitted by Mr Coleman. The position of a mortgagee was succinctly put by Salmon LJ in Cuckmere Brick Co. v Mutual Finance Ltd [1971] 1 Ch 949, at 965G:

“It is well settled that a mortgagee is not a trustee of the power of sale for the mortgagor. Once the power has accrued, the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained.  He has the right to realize his security by turning it into money when he likes.

If the mortgagee’s interests, as he sees them, conflict with those of the mortgagor, the mortgagee can give preference to his own interests, which of course he could not do were he a trustee of the power of sale for the mortgagor”  (emphasis added)

51.The case of Medforth v Blake [2000] Ch 86, which was relied on by Mr Coleman in his submissions, does not assist him.  It was a case which dealt with the duties owed to a mortgagor by a receiver and manager of a property, appointed by the mortgagee creditors under the relevant loan arrangements.  That was obviously a completely different situation.

No breach of duty in any event

52.The facts in this case, as found by the lower courts, do not help Mr Nyeu either. Following the stock market crash in October 1997, there was a huge reduction in the market value of the securities held by Strong Offer as security for the loans advanced. But no deposits were paid by Mr Nyeu despite various margin calls. By mid December 1997, the stock market dropped further and the market value of the securities fell below the total indebtedness under the margin accounts.  Further demands were made.  It was even suggested to him that he should perhaps pay the interest first.  This was refused. From time to time, he asked for indulgence and requested Strong Offer not to liquidate his accounts or to sell the securities. Finally, he promised to pay further deposits.  Four payments in the total sum of about $2.5 million were made by him or his friend on his behalf on 4 February, 4 March, 26 March and 29 April 1998. The correspondence showed that numerous demands were made even after the last payment was made in April 1998 but they were ignored. The margin accounts were finally liquidated and the securities were sold at the then market prices at the end of December 1998.

53.The conduct of Mr Nyeu since the stock market crash in October 1997 certainly gave rise to the impression that he would like to hold on to his securities as long as possible and was hoping for a rebound in the market. This must be the natural reaction of most investors or speculators who were involved in trading in the stock market at the relevant time. There were in fact indications at that time that a rebound would happen. In a letter sent to Mr Nyeu on 26 March 1998, Mr Ying expressed the opinion that according to market expectations, the market would pick up again towards the latter part of that year or the beginning of 1999. While there was no reply to this letter from Mr Nyeu saying whether he accepted this opinion or not, a further deposit was made in April 1998. This illustrated the general surmise and uncertainty at the time. The fact that Mr Coleman suggested several possible dates for liquidation demonstrates the point. As Mr Shieh said in submission, the matter could not be considered with hindsight, particularly in relation to something as volatile as the stock market. In these circumstances, Strong Offer could not be blamed for deciding to liquidate the margin accounts in December 1998 and not earlier. 

Conclusion

54.For the reasons given above, subject to the adjustment in the judgment sum to take into account the element of compound interest, the appeal is dismissed. In view of the concession made by Strong Offer through counsel, I would make a declaration to the effect that any element of compound interest in the judgment debt must be removed and the judgment debt reduced accordingly. As an exercise like this will obviously take time, I would also give the directions as set out in paragraph 1 above.

55.As to costs, Mr Coleman accepted that Mr Nyeu should be liable for the costs in the courts below, but as to the costs of this appeal, he argued that since the judgment sum was to be reduced in his favour, he should at best have the costs of this appeal or at worst, should not be ordered to pay any costs. On the other hand, Mr Shieh submitted that since all the grounds of appeal were rejected and that the adjustment to be made to the judgment sum was conceded, there should be an apportionment and he should get at least 90% of his costs.  I think that the starting point must be costs to follow the event and except for the element of compound interest, there is no reason to depart from this usual practice. In this appeal, all the preparation work until a few days before the hearing was done on the basis of the perfected grounds of appeal without the question of compound interest. All the grounds of appeal failed but no doubt, the parties had spent time in preparation and at the hearing on this question which in a way was successful, albeit ultimately by concession. That being the case, I think that Mr Nyeu should not be ordered to pay the full costs of this appeal. I take the view that it is fair to award only 75% of the costs of the appeal to Strong Offer and I would so order.  The costs orders in the courts below would stand.

Mr Justice Ribeiro PJ:

56.I agree with the reasons given by Mr Justice Chan PJ and would like to add a few observations of my own in relation to money lenders and margin trading.

57.As I pointed out in Emperor Finance Ltd v La Belle Fashions Ltd (2003) 6 HKCFAR 402, money lenders who, prior to the amendments mentioned below, engaged in financing margin trading on securities faced intrinsic problems in trying to comply with the documentary requirements of the Money Lenders Ordinance.  There was particular difficulty complying with the requirement of section 18(2)(d) that the statutory note or memorandum should “set out ... the amount of the principal of the loan in words and figures” since the balance due from the borrower would fluctuate with the execution of trades and with calls for additional margin.  This would be very likely to involve the making of more than one loan which would not be properly documented.

58.In Emperor Finance, there existed a note or memorandum which stated (in words and figures) that the principal amount lent was $1 million.  However, that amount was exceeded when margin calls had to be funded.  This meant that additional loans were made without any required statutory note or memorandum, plainly in breach of section 18(1), making the additional loans prima facie unenforceable.[1]  In the present case, there was no principal amount specified at all, putting the respondent plainly in breach of either or both sections 18(1) and 18(2)(d) and making the loans prima facie unenforceable.

59.Cases such as these raised the question whether money lenders can ever make enforceable loans for the purpose of financing securities trading on margin where such trading has led, by its very nature, to non-compliance with the section 18 documentary requirements.  I say “raised” in the past tense because on 1 April 2003, a new legislative scheme for the regulation of securities margin financing came into force, taking companies which are duly registered to perform that regulated activity under the Securities and Futures Ordinance (Cap 571) out of the Money Lenders Ordinance,[2] thereby exempting them from its documentary and other requirements.  Such companies come under regulation of a different type which need not be discussed here.

60.The approach adopted in Emperor Finance was to treat pre-April 2003 non-compliant loans by money lenders engaging in securities margin financing as not necessarily unenforceable.  The Court recognized that such breaches rendered the loan agreement prima facie unenforceable, but did not treat them as sufficient to compel refusal of enforcement in every case.  This is because section 18(3) confers a discretion whereby:

“... 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.”

61.It follows from section 18(3) that, having found one or more breaches of the section established, the Court goes on to consider whether it ought nevertheless to exercise its discretion in favour of enforcement, the burden being on the money lender to satisfy the court that in all the circumstances it would be inequitable to refuse enforcement notwithstanding non-compliance.  As stated in Emperor Finance, in exercising its discretion the court examines the breaches in question, their consequences for the parties to the transactions and any other circumstances which may make it inequitable to hold the agreements unenforceable.[3] 

62.In this context, the particular circumstances of the borrower are highly important.  A key consideration is whether any prejudice flows from the statutory breaches established.  Plainly, breaches of the documentary requirements for specifying the amount borrowed, the interest rate, and so forth, are likely to prejudice a borrower who, not having a proper note or memorandum, may fail fully to appreciate the terms of the transaction entered into.  The absence of a proper note or memorandum would make it difficult to verify the extent of his liabilities, with or without help from others.  In such cases the money lender would be most unlikely to satisfy the court that a refusal to enforce the agreement would be inequitable.  On the other hand, a sophisticated speculator who has authorised and is kept fully informed of all the trades done on his behalf and all borrowings incurred to effect those trades is in a different situation.  A person who has chosen with eyes wide open to take the risks of highly leveraged trading on credit, may suffer no prejudice at all from deficiencies in the original documentation.  The court may be satisfied in such a case that the equities favour enforcement. 

63.Additionally, as noted in Emperor Finance,[4] the court may take into account in relation to pre-April 2003 cases, purely as a backdrop to the exercise of its discretion, the fact that the legislative policy for the regulation of securities margin financing has since changed, removing the need for each loan to be documented where stipulated registration procedures are satisfied.  I might add that money lenders who have not secured the exemption now catered for by Schedule 1 to the Money Lenders Ordinance and by the Securities and Futures Ordinance cannot expect a sympathetic exercise of discretion if they nevertheless engage in non-compliant securities margin financing.

64.I agree, for the reasons given by Mr Justice Chan PJ, that in the present case, the documentary deficiencies did not cause any prejudice to the appellant.  He was a sophisticated speculator who had given the account executive discretion to trade on his behalf, who was kept fully in the picture and who had been happy to enjoy the high positive balances achieved when the going was good.  The liabilities he faces are the consequences of his high-risk investment strategy in a market which crashed.  To refuse enforcement here on the basis of documentary breaches which caused him no prejudice would be inequitable.

65.Turning to compound interest, the respondent purported to charge such interest when there was no contractual entitlement to do so.  That element of the respondent’s claim therefore has no legal foundation and the judgment pronounced in its favour must be varied to strip out any compound interest element.  This conclusion does not involve any discretionary exercise on the Court’s part.

Mr Justice Mortimer NPJ:

66.I agree with the judgment of Mr Justice Chan PJ and the judgment of Mr Justice Ribeiro PJ.

Lord Scott of Foscote NPJ:

67.I agree with the judgment of Mr Justice Chan PJ and the judgment of Mr Justice Ribeiro PJ.

Mr Russell Coleman, SC (instructed by Messrs W K To & Co.) for the appellant

Mr Paul Shieh, SC and Ms Jane Curzon Lo (instructed by Messrs J Chan & Lai) for the respondent

[1]     At §95.

[2]     Money Lenders Ordinance, Schedule 1, Pt 1, paras 10 and 11.  The registration required is under Pt V of the Securities and Futures Ordinance.  These came into force on 1 April 2003 by virtue of LN 12 of 2003.

[3]     At §119.

[4]     At §120(d).