EMPEROR FINANCE LTD v. LA BELLE FASHIONS LTD AND ANOTHER

bjbj FACV No. 6 of 2003 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO. 6 OF 2003 (Civil) (ON APPEAL FROM CACV No. 1476 of 2001) _______________________ (Originally High Court Action No. 12310 of 1997) Between: EMPEROR FINANCE LIMITED Appellant (2nd Plaintiff) - and - LA BELLE FASHIONS LIMITED 1st Respondent (1st Defendant) NG SIU MY, AMY 2nd Respondent (2nd Defendant) _______________________ (Originally High Court Action No. 12312 of 1997) Between: EMPEROR FINANCE LIMITED Appellant (2nd Plaintiff) - and - HUBBARD COMPANY LIMITED 1st Respondent (1st Defendant) NG SIU MY, AMY 2nd Respondent (2nd Defendant) _______________________ Court: Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Litton NPJ and Lord Millett NPJ Dates of Hearing: 13 14 October 2003 Date of Judgment: 6 November 2003 _______________________ J U D G M E N T _______________________ Mr Justice Bokhary PJ: I agree with the judgment of Mr Justice Ribeiro PJ. Mr Justice Chan PJ: I agree with the judgment of Mr Justice Ribeiro PJ. Mr Justice Ribeiro PJ: The two actions leading to this appeal were tried together by Deputy High Court Judge Poon. In each case there were two plaintiffs, namely, Emperor Futures Limited ( Futures ) and Emperor Finance Limited ( Finance ), and two defendants. The 1st defendants were, respectively, La Belle Fashions Limited ( La Belle ) and Hubbard Company Limited ( Hubbard ). Madam Amy Ng Siu My ( Madam Ng ) was the 2nd defendant in both cases. La Belle and Hubbard had engaged in trading the derivative investment product known as Hang Seng Index Futures as clients of Futures, with credit provided to them by Finance. Madam Ng, who owned and controlled La Belle and Hubbard, had personally guaranteed their liabilities to each plaintiff. After the stock market collapse of October 1997, the plaintiffs brought proceedings against the defendants in respect of allegedly unpaid balances on their accounts. The Judge found in the plaintiffs favour and entered judgment against La Belle and Hubbard in the respective sums of $3,018,952.73 and $1,194,948.55, together with interest. Madam Ng was found liable for those amounts as guarantor but was entitled to set off against such liabilities the sum of $2,463,982.39 held to her personal account, the set-off being apportioned to each action in proportion with the two judgment amounts. The Court of Appeal, whose principal judgment was delivered by Rogers VP (with Le Pichon and Yuen JJA concurring), allowed the defendants appeal. It did so on the basis that certain findings of fact made by the Judge had to be set aside; that Finance was unlawfully carrying on a banking business and taking deposits in breach of the Banking Ordinance (Cap 155); and that loans made by Finance were unenforceable due to breaches of the Money Lenders Ordinance (Cap 163). The claims of Futures were dismissed on a concession that it had no cause of action against any of the defendants. Finance s claims against Hubbard were also dismissed with certain consequential reimbursements ordered. The La Belle action was ordered to be remitted to the Court of First Instance to determine whether La Belle should be allowed to amend its pleadings so as to permit consideration of a possible exercise of the court s discretion under section 18(3) of the Money Lenders Ordinance to enforce non-compliant loans. Finance brings this appeal by leave of the Court of Appeal pursuant to section 22(1)(a) of this Court s statute. (a) The undisputed facts (i) The opening of the accounts Madam Ng caused accounts to be opened with the plaintiffs for La Belle on 29 May 1997 and for Hubbard on 2 June 1997. In each case, two accounts were opened, one with Futures and one with Finance. In relation to Futures, La Belle, through Madam Ng, executed a Client Agreement and a Risk Disclosure Statement. Futures and La Belle thereby agreed that Futures would open a trading account for La Belle (A/c No. 4718) and act as its commodities brokers. Trading (which was to be in Hang Seng Index Futures) would be done on margin, with La Belle agreeing, among other things, to meet all margin requirements raised by Futures. In the Risk Disclosure Statement, La Belle acknowledged the risks inherent in leveraged trading. In relation to Finance, La Belle executed a General Loan and Security Agreement ( the Loan Agreement ) and a Margin Loan Facility letter ( the Facility Letter ). By these documents, Finance agreed to grant to La Belle a revolving margin loan facility with a credit limit of HK$1 million to be used in connection with La Belle s dealings on its trading account with Futures or to settle amounts that might be payable by La Belle to Futures. For this purpose a finance account (also A/c No 4718) was established for La Belle with Finance and credited with an initial deposit of HK$300,000. The Facility Letter also contained provisions regarding a right to increase the credit limit and regarding the rate of interest chargeable which will require discussion below. Finance was a registered money lender and La Belle was provided with a memorandum purportedly made pursuant to the Money Lenders Ordinance ( the Memorandum ), setting out certain details of the credit arrangement. To signify acknowledgment, La Belle s rubber chop was applied at the foot of the Memorandum, with Madam Ng signing in the space provided within that chop over the words Authorized Signature . These and other features of the Memorandum will also require further discussion. La Belle also signed a Letter of Authority ( the Authorisation ) constituting Finance its agent empowered to make transfers to and from its trading and finance accounts with Futures and Finance. Madam Ng signed personal guarantees in favour of Futures and Finance. In respect of Finance, she agreed to act as surety in respect of all moneys advanced to or paid for or on account of La Belle and to discharge any other liabilities incurred by La Belle to Finance. All of the documents mentioned above were dated 29 May 1997. A set of the same documents, all dated 2 June 1997, were executed in respect of Hubbard. This resulted in a trading account and a finance account (both numbered 4728) being opened for Hubbard by Futures and Finance respectively. Again, an initial deposit of HK$300,000 was made into the finance account. By the time the La Belle and Hubbard accounts were established, Madam Ng had had considerable experience of margin trading. In March 1996, she had set up accounts in her own name with Finance and with Emperor Securities Limited (a company in the same group as the plaintiffs), used for trading in securities. In November 1996, she had opened similar accounts for her company, Moon Sky Limited ( Moon Sky ). These accounts were actively traded. When the La Belle and Hubbard accounts were established, trading in the Moon Sky account and in her personal account ceased. However, securities of some value continued to be held in Madam Ng s securities account and a credit balance remained in her personal finance account. Mr Wilson Lee Wai Shing ( Mr Lee ), employed as a senior marketing manager, was the individual who dealt with Madam Ng on the plaintiffs behalf. Ms Vanessa Fan Man Seung ( Ms Fan ) was the plaintiffs managing director. (ii) Hang Seng Index Futures Trading in Hang Seng Index Futures involves taking positions on the movement of the underlying stock market index during a specified month. A trade involves opening a contract with the Hong Kong Futures Exchange ( the Exchange ) which might either be a contract to buy or to sell at a stated level of the index referred to as the contract price . A person acquiring a position (referred to as a bought lot ) stands to gain if the underlying market rises and to lose if it falls. Conversely, a person acquiring a sell position stands to gain if the market falls and to lose if it rises. Until the open position is closed by the acquisition of an opposite matching contract, such gains or losses are unrealised and referred to as floating gains or floating losses. Thus, an open position is closed by the acquisition of a matching sell lot and vice-versa. The profit or loss accruing is represented by the difference in the opening and closing contract prices, accruing at the rate of HK$50 per index point difference between those contract prices. As a pre-requisite to trading and as a condition of maintaining open positions acquired, the person trading is required to provide sums of money to serve as margin to cover potential losses when closing out his positions. The minimum margin requirements are set by the Exchange and monitored by the broker. If the market moves against a client s open position so that his floating losses reach a level where the amount of margin in his account provides an insufficient cushion, the broker makes a margin call requiring further funds to be paid into the trading account if the open positions are to be maintained. If such additional margin is not forthcoming, the broker may close out the contract and crystallize the floating loss. If the market moves favourably, the customer may choose to close out his open position and crystallize the floating profit. To take one example of a completed trading contract in the present case, on 24 July 1997, La Belle acquired 5 bought lots for the August contract month at the contract price of 15760. That position remained open until it was closed by La Belle s acquisition of 5 sold lots on 28 July 1997 at the contract price of 15785. The favourable difference being 25 index points, the gross gain realised (before deduction of commission and levy) was $6,250 (25 x HK$50 x 5 lots). (iii) How the accounts were operated The finance and trading accounts opened by La Belle and Hubbard with Finance and Futures operated in tandem. Where, due to market movements or the acquisition of new positions, additional margin was required, funds would be transferred to the trading account from the finance account. In so far as necessary, such funds would be provided by drawing on the credit provided by Finance. Where surplus trading profits arose in the trading account, these would be transferred at the end of the trading week or on the eve of a public holiday to the finance account, reducing any debit balance or increasing any credit balance standing in that account. Although the credit extended to each of La Belle and Hubbard was stated to be limited to $1 million, Finance tended to permit that limit to be exceeded to meet margin requirements in order to maintain existing open contracts when satisfied that the overall balance, including the balances in Ng s personal accounts, showed an acceptable surplus on a hypothetical liquidation of all positions. (iv) Madam Ng s approach to trading Madam Ng s approach to trading was initially conservative. La Belle would only acquire bought lots and Hubbard only sold lots. So when the market moved adversely to La Belle s bought positions (by falling), the resultant floating losses would be off-set by the floating gains made on the Hubbard sold positions. Similarly, where the market rose, Hubbard s losses would be to a greater or lesser extent off-set by La Belle s gains. This is sometimes called a straddle or hedge strategy. Where similar numbers of lots were held by La Belle and Hubbard, the range of possible gains and losses overall would be limited. But on 6 October 1997, Madam Ng changed her strategy. She caused all of Hubbard s positions to be closed. La Belle, however, not only continued to hold open positions, but proceeded to increase its holdings from 14 bought lots on 6 October to 21 bought lots on 9 October. Madam Ng was speculating that the market would rise. If that occurred, La Belle s open positions would yield gains which would not be confined by Hubbard s off-setting straddle positions. Of course, removal of the straddle also meant that La Belle became vulnerable to a fall in the market. (v) The Transfer In the early hours of the morning on 10 October 1997 (which was a public holiday), the entire credit balance in the sum of HK$2,233,522.50 in Hubbard s trading account was transferred to the credit of La Belle s finance account ( the Transfer ). The entries shown in the relevant accounts before and after the Transfer are as set out below. As at 9 October 1997 before the Transfer La Belle Hubbard Open positions 21 bought lots Finance account ($1,157,846.90) ($2,026,223.18) Trading account $2,132,750.00 $2,233,522.50 As at 10 October 1997 after the Transfer La Belle Hubbard Open positions Finance account $1,075,675.60 ($2,026,223.18) Trading account $2,132,750.00 How the Transfer came about was a matter of controversy discussed further below. (vi) Events following the Transfer On 16 October 1997 Madam Ng deposited $300,000.00 in the Hubbard finance account. She deposited a further sum of $550,000.00 in that account on 22 October 1997. Why and in what circumstances this was done was disputed at the trial. In the 13 trading days between 9 October 1997 and 28 October 1997 the prices of Hang Seng Index Futures fell steeply and, at some points, dramatically, resulting in the rapid accumulation of large floating losses in La Belle s trading account, as shown in the following table. Closing prices for Hang Seng Index Futures Closing Change Cumulativechange HK$ Floating gain/(loss) on La Belle s trading account 09.10.97 14200 (662,750) 13.10.97 14120 - 80 - 80 (746,750) 14.10.97 13660 - 460 - 540 (1,229,750) 15.10.97 13270 - 390 - 930 (1,639,250) 16.10.97 13670 + 400 - 530 (1,219,250) 17.10.97 13525 - 145 - 675 (1,371,500) 20.10.97 12860 - 665 - 1340 (2,069,750) 21.10.97 12330 - 530 - 1870 (2,626,250) 22.10.97 11700 - 630 - 2500 (3,287,750) 23.10.97 10600 - 1100 - 3600 (4,442,750) 24.10.97 11240 + 640 - 2960 (3,770,750) 27.10.97 10230 - 1010 - 3970 (4,831,250) 28.10.97 8710 - 1520 - 5490 Madam Ng sought to sustain her open positions, no doubt in the hope that the market would turn, allowing her to re-coup her losses. On 23 October 1997, she agreed to sell 20,000 HSBC shares held to her personal account so that the proceeds could be used to support the La Belle open positions. The sale realized about $3.8 million and, after setting off the then debit balances on her personal account, a balance of $2,465,394.43 became available for that purpose. However, with the continuing precipitous deterioration of the market, the La Belle positions were closed by Futures on 28 October 1997. As the plaintiffs alleged that there remained unpaid negative balances in the La Belle and Hubbard accounts, the present action ensued. (b) The facts disputed at the trial At the trial, the Judge rejected the defendants allegations of misrepresentation, undue influence, failure to make a proper demand for payment and breaches of the rules of the Exchange. These allegations were not pursued on appeal and are not live issues in this Court. However, two issues on which the evidence conflicted remain material, namely, as to (i) whether the Transfer had been ratified by Madam Ng; and (ii) whether Madam Ng had instructed Mr Lee to close the La Belle positions on 24 October 1997. (i) The Judge s findings The Judge rejected Madam Ng s version of the events in its entirety. Although he was troubled by certain prior contradictions in the evidence of Mr Lee, he resolved his doubts relying on the evidence as a whole, including the testimony of Mr Eric Lai Hing Wah ( Mr Lai ) who had formerly been employed by the plaintiffs as a settlements clerk, and found as follows :- (1) that the Transfer was a mistake made by Mr Lai; (2) that Ms Ng, having been informed of it by Mr Lee, had rectified [ratified] it on or about 16 October in the sense that she instructed Mr Lee that the Transfer was to stand; (3) that Ms Ng did not request to reverse the Transfer as alleged; (4) that Mr Lee had not failed to carry out the closure instruction on La Belle s 21 futures positions as alleged; and (5) that Ms Ng had instructed Mr Lee to hold on the said futures positions. (ii) The Court of Appeal s intervention on the facts The Court of Appeal overturned findings (2) and (3) above, which bear on whether the Transfer was ratified by Madam Ng. The other three findings were left undisturbed. It is of particular significance to note that the Court of Appeal questioned neither the Judge s rejection of Madam Ng s evidence nor his finding that she had not given any closing-out instructions. The Judge s findings relevant to the Transfer were reversed on the grounds :- that there was a serious contradiction in Mr Lee s evidence in that, in the pleadings and other documents filed on the plaintiffs behalf, including Mr Lee s first witness statement filed in April 1999, it was asserted that he had sanctioned the Transfer, having been impliedly authorized to do so, whereas in documents filed by the plaintiffs in October 1999 and January 2000 and in Mr Lee s testimony, it was asserted that the Transfer had been effected by mistake but that Madam Ng had later expressly agreed to adopt or ratify it; that this contradiction was not explained adequately or at all by Mr Lee; that the Judge was wrong to think that he did not need to resolve the contradiction because he was able to rely on the evidence of Mr Lai since such evidence merely established that the Transfer had been made by Mr Lai by mistake but did not assist the plaintiffs in establishing ratification by Madam Ng; and, that there was accordingly no credible evidence to support the plaintiffs case that Ms Ng had given specific instructions not to reverse the transfer. (c) The Court of Appeal s reversal of the Judge s findings was unjustified With respect, for the reasons developed below, it is my view that the Court of Appeal s reversal of the Judge s findings, which were findings of primary fact, was unjustified. Such a reversal required the Court of Appeal to be satisfied, even without the advantages enjoyed by the Judge who received the evidence first hand, that the Judge was plainly wrong and that his decision ought to have been the other way: Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at 349-350. In my view, far from being plainly wrong, the Judge was entitled to approach the evidence in the way that he did and entitled to reach his conclusion that the Transfer had been ratified. Indeed, that was the only conclusion consistent with the undisturbed evidence as to Madam Ng s insistence on maintaining La Belle s open positions in the then prevailing market conditions. (i) Mr Lee s contradictory evidence There is no doubt that Mr Lee had contradicted himself, as the Judge recognized and as was accepted by Mr Lee himself. It is, however, important not to overstate the nature or extent of the contradiction. The passage in Deputy Judge Poon s judgment where this matter is dealt with begins with the heading: The Transfer, failure to reverse and to close out positions. The passage then states as follows :- I accept the evidence of Mr Lai on the Transfer. I do not see any reason why he had to make up the evidence for his ex-employers. And he was not shaken under cross-examination. I find him a truthful witness. I note what Mr Lee had said in his first witness statement about the Transfer. He had now offered an explanation on why such a mis-description had been made. I must confess I have some difficulty in accepting his explanation. But in light of Mr s evidence, I do not think I need to deal with this part of Mr Lee s evidence any further. The judgment then proceeds to examine the evidence of what had occurred after the making of the Transfer, beginning with an examination and rejection of Madam Ng s version of events touching on ratification. It is clear that the Judge was seeking to deal separately with three issues: (i) the Transfer, (ii) its non-reversal, and (iii) the alleged closing-out instructions. It was in relation to the first and relatively narrow issue as to whether the Transfer had been authorized or erroneous, that the Judge took the view as he was entitled to that, while not satisfied with Mr Lee s explanation of his earlier, inaccurate statement, Mr Lai s first-hand evidence, together with contemporaneous records of the making of the Transfer, established that the later, error version was correct. Indeed, as Rogers VP commented, this was a conclusion to which the judge could scarcely have failed to have arrived. However, Rogers VP appears to have regarded the Judge as falling into error by relying on Mr Lai s evidence illegitimately for a much wider purpose, that is, as somehow supporting the conclusion that Madam Ng had ratified the Transfer. He was also of the view that the Judge had failed to give sufficient weight to the contradiction in assessing Mr Lee s general credibility. His Lordship stated :- 43. Mr Lee s first witness statement was therefore directed not just to explaining how the entry came to be made but, more importantly, to substantiating the plaintiffs case that they had prior and standing authority to make the transfer. This was a crucial part of the plaintiffs case since without authority to make the transfer their action, at least in respect of Hubbard, would fail. By approaching his decision on the basis that he did not have to resolve Mr Lee s change in evidence, the judge failed to note that Mr Lee s original evidence was given in support of the plaintiffs then pleaded case of authority. On the face of the matter it is difficult to see how an analysis of this aspect of Mr Lee s evidence could lead to the conclusion that Mr Lee was a credible witness in relation to the justification for the plaintiffs retaining the transfer to the La Belle finance account. Indeed the judge in effect said that he was not satisfied that Mr Lee s evidence was credible. The judge failed to note that Mr s original evidence had been given in support of a rather more complicated case on behalf of the plaintiffs that the transfer had been made with authority when, if Mr s subsequent evidence was correct, all that would have been said was that Ms Ng had subsequently approved the transfer. Equally importantly, although Mr Lai s evidence contradicted Mr Lee s first version, it did not in any way support Mr Lee s later allegation of specific authorisation from Ms He concluded :- 45. In my view, in the state of the evidence as it appears and in the circumstances of what the judge said about Mr Lee s evidence, I do not consider that any reliance could be placed on Mr Lee s assertion in oral evidence that Ms Ng had given specific instructions not to reverse the transfer without the question of Mr Lee s credibility in this respect being resolved. Other pieces of evidence, e.g. as to why amounts were deposited into Hubbard s finance account, also depended upon the resolution of conflicting evidence between Mr Lee and Miss Ng. On that basis there was no credible evidence to support the plaintiffs case that Ms Ng had given specific instructions not to reverse the transfer of the money which had been made into La Belle s finance account. If it were in fact the case that Mr Lee had somehow contrived to remember only very late in the day that Madam Ng had agreed to leave the transferred funds in the La Belle account without having previously made any such suggestion, this would have been cause for the gravest concern as to his credibility. However, this was not in fact the position. The allegation that Madam Ng had expressly agreed to the Transfer and had then acted consistently with such agreement by making deposits into the newly-depleted Hubbard account had appeared in Mr Lee s first witness statement. It was not a recent invention and Mr Lee s evidence at the trial did not involve a contradiction of what he had said earlier. Thus, at para 21.1 of his first witness statement, after describing the Transfer and (inaccurately) stating that he had authorized it to reduce the deficit in La Belle s finance account, he stated: Ms Ng subsequently approved the transfer . At para 21.4, he stated :- After checking her own records, Ms Ng agreed to and approved the transfer. She then paid into Hubbard s loan account HK$300,000.00 on 16th October 1997 and HK$550,000.00 on 23 October 1997, pursuant to my margin call on Hubbard s loan account....... Having disposed of the first, Transfer issue, the Judge returned to Mr Lee s evidence on the question of ratification after having considered and rejected Madam Ng s evidence in that context, stating :- Up to now, I have disposed of most of the factual disputes where Mr Lee s evidence conflicted with Ms Ng s. At this juncture, I think it is apt to mention this. When I assessed Mr Lee s credibility as a whole and on various matters, I had in mind his change of evidence on the Transfer. And I had approached his evidence with caution. In the light of the poor quality of Ms s evidence, which I have sought to demonstrate above, and the fact that there existed other evidence consistent with Mr Lee s evidence, I accept his evidence despite the change and his not very convincing explanation. ...... The Judge was therefore looking quite separately at the conflict of evidence between Madam Ng and Mr Lee as to whether she had agreed to the Transfer and had in the forefront of his mind the impact which Mr Lee s inconsistent evidence had on his credibility. The Judge was quite entitled to find that there had been ratification and, as appears from what follows below, he was perfectly correct to state that other evidence indeed, other objective and undisputed evidence leading to findings which were left undisturbed by the Court of Appeal was wholly consistent with that finding. (ii) Keeping the La Belle positions open necessitated ratification As mentioned above, Madam Ng had decided on 6 October to adopt the risky strategy of undoing her straddle position and maintaining 21 open bought lots in the La Belle account. There was no dispute between the parties that, at least until 24 October 1997, her stance had been to maintain those open positions in the teeth of the falling market. Although she testified that she had given Mr Lee closing-out instructions on 24 October, the Judge did not believe her and found instead that she had continued to insist on keeping La Belle s positions open until their eventual liquidation by Futures on 28 October. That finding was not disturbed by the Court of Appeal. After the Transfer, Madam Ng was, as usual, in daily receipt of statements showing the position on her accounts with the plaintiffs. She was undoubtedly fully aware of the plummeting market and that very large floating losses were being incurred on the La Belle account, as set out in paragraph 18 above. She was an experienced trader and was undoubtedly aware that the positions could only be kept open if her floating losses were adequately covered by margin. Prior to 23 October, she was not herself making any fresh margin payments but the 21 positions were nevertheless being kept open at her request. It therefore had to follow, and she plainly must have realised, that the necessary margin was being supplied from the funds transferred from the Hubbard account, the Transfer being the only possible source of such funding. At the Court s request, Mr Anthony Neoh SC, appearing with Mr Denis Yu on behalf of Finance, prepared a schedule calculated on the basis of the figures contained in the account documents which were in evidence. The schedule shows the extent to which the La Belle finance account would have gone into debit if the Transfer had immediately been reversed out while keeping the La Belle positions open. The projected debit balances are as follows :- Date Projected debit balance in La Belle finance account 09 October 1997 1,157,846.90 10 October 1997 1,157,846.90 13 October 1997 1,157,846.90 14 October 1997 1,724,846.90 15 October 1997 2,134,346.90 16 October 1997 2,134,346.90 17 October 1997 2,134,346.90 18 October 1997 1,866,596.90 20 October 1997 2,564,846.90 21 October 1997 3,121,346.90 22 October 1997 3,782,846.90 23 October 1997 4,937,846.90 24 October 1997 4,934,846.90 25 October 1997 4,370,846.90 27 October 1997 5,431,346.90 28 October 1997 5,431,346.90 29 October 1997 5,237,228.40 It is inconceivable that Madam Ng could somehow have thought that she could insist on reversal of the transfer while at the same time insisting on keeping the 21 La Belle positions open without furnishing large amounts of fresh margin. Indeed, she was plainly under no such illusion since, on 23 October, she accepted the necessity of selling her HSBC shares to make the proceeds available in support of the open positions. The compelling conclusion is that after discovery of the mistaken Transfer, Madam Ng had agreed to utilise the transferred funds as margin with a view to maintaining La Belle s open positions and that when, by 23 October, those funds had been eaten up by margin calls, she had agreed to make further funds available to support those positions by selling her bank shares. (iii) Deposits into the Hubbard account The deposits of $300,000 and $550,000 respectively made by Madam Ng into the Hubbard account on 16 and 22 October constitute another piece of evidence consistent with Madam Ng having ratified the Transfer. But for the Transfer, Hubbard would have had an overall credit balance and, since all its trading positions had been closed, there were no margin requirements and no point would have been served in depositing a total of $850,000 into its finance account. On the other hand, such payments were wholly consistent with Madam Ng s acknowledgment that Hubbard had been left with a large liability to Finance after the Transfer and that there was accordingly a need to reduce the deficit. The Judge noted Madam Ng s assertion that she had initially intended to deposit the two sums for the credit of La Belle s account but had been prevailed upon by Mr Lee to credit them to Hubbard instead. He also noted her evidence that she had consequently altered the account number written on the pay-in slip for the first payment, changing it from 4718 for La Belle to 4728 for Hubbard. However, the Judge rejected this evidence, stating that he could not accept that Madam Ng would, as late as 22 October, compliantly fall in with Mr Lee s suggestion if he was in fact still refusing to reverse the Transfer at her request. This he was entitled to do. One notes in passing that Hubbard s account number appeared with no sign of alteration on the second pay-in slip dated 22 October. In any event, the Judge s findings on the deposits into the Hubbard account were not disturbed. (iv) No reason initially to refuse reversal of Transfer One might add finally in this context that no one has suggested any reason why Mr Lee or the plaintiffs should have insisted on retaining the funds in the La Belle account against Madam Ng s wishes when the erroneous Transfer was first discovered. If it had been reversed out immediately, then the La Belle and Hubbard accounts would have reverted to their state as at 9 October 1997, shown in paragraph 16 above. If this had happened, Madam Ng would not have been subject to any demands for funds for the Hubbard account but would have faced such demands in relation to La Belle, in the light of her strategy of keeping its positions open. It really made no difference to the plaintiffs whether the transferred funds remained with La Belle or reverted to Hubbard or whether margin calls went out to La Belle or to Hubbard. The overall financial position would have been the same and Madam Ng had in any case guaranteed both accounts. (v) Consequences It is accordingly my view that the Court of Appeal erred in overturning the Judge s findings regarding ratification of the Transfer, in ordering that the Hubbard accounts be reconstituted and in dismissing the claim against Hubbard. Subject to the questions of illegality and unenforceability discussed below, the Judge s findings as to the net balances due from La Belle and Hubbard to Finance must be restored. (d) The Banking Ordinance (i) The approach of the Court of Appeal The Court of Appeal rested its decision to reverse the Transfer on a second and alternative ground. It held that in operating the trading and finance accounts in tandem, and in particular by arranging for amounts surplus to margin requirements in a client s trading account held with Futures to be periodically transferred to the finance account held with Finance, Finance was engaging in the business of banking and of taking deposits in breach of sections 11(1) and 12(1) of the Banking Ordinance. Rogers VP explained his reasoning as follows :- 53. The question which arises in this case is whether the operation of the finance accounts by the 2nd plaintiff contravenes the Banking Ordinance. ...... 56. ...... It ...... emerges quite clearly [from the evidence of Ms Fan] that the way in which the 2nd plaintiff operated the accounts included taking deposits which would be repayable to the client on demand. ...... 57. In my view, there has been a breach of section 11(1) and section 12(1) of the Banking Ordinance. It is, of course, evident that a payment which discharges a debt does not constitute a deposit within the meaning of the Banking Ordinance. Neither does a payment which is referable to the provision of property or service constitute a deposit. In this case, however, it is clear that payments were made even in situations where the relevant finance account was in credit. Those payments would have been made primarily from the futures accounts and could not be said to be referable either to property or to services. They were simply deposits made into the relevant finance account. They would have been repayable on demand and were made in the ordinary course of the plaintiffs business. ...... The Court of Appeal then turned to the Transfer and held that it constituted an illegal banking deposit with Finance, presumably made by Hubbard. In consequence, it decided that the Transfer had to be reversed. Rogers VP put this in the following terms :- 60. Having given this matter careful consideration, I consider that the court should not give the plaintiffs any assistance insofar as they have operated the accounts of the 2nd plaintiff illegally but this should not debar the 2nd plaintiff from recovering in respect of loans which had been lawfully made. In this respect, however, the transaction whereby the La Belle finance account was credited with the balance of the Hubbard futures account leaving a substantial credit balance in the La Belle finance account was, in my view, illegal. This, therefore, is another reason why the plaintiffs transfer of the Hubbard money should be looked at on the basis that the plaintiffs cannot take the benefit of that deposit into the La Belle finance account. For that reason, too, the credit for that amount must be given to the Hubbard finance account and not to the La Belle finance account. In reaching this conclusion, the Court of Appeal rejected the argument that even if there had been a contravention, section 129(1) of the Banking Ordinance expressly provided that this should not render the contract unenforceable. With respect, it is my view that the Court of Appeal s conclusions as to illegality and unenforceability under the Banking Ordinance are untenable. (ii) The statutory provisions The sections said to have been contravened materially provide as follows :- Section 11(1) No banking business shall be carried on in Hong Kong except by a bank ...... Section 12(1) No business of taking deposits shall be carried on in Hong Kong except by an authorized institution ...... The words banking business and deposits are therefore important. Banking business is defined by section 2 as meaning :- the business of either or both of the following: (a) receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than the period specified in item 1 of the First Schedule or with a period of call or notice of less than that period; (b) paying or collecting cheques drawn by or paid in by customers. Likewise, deposit :- (a) means a loan of money- (i) at interest, at no interest or at negative interest; or (ii) repayable at a premium or repayable with any consideration in money or money s worth; but (b) does not include a loan of money- (i) ...... (ii) upon terms referable to the provision of property or services; ..... and references in this Ordinance to the taking or the making of a deposit shall be construed accordingly. (iii) Receiving from the general public Finance could only be carrying on a banking business in breach of section 11(1) if it was receiving money from the general public. There is simply no basis for treating the relevant monies, whether those received by Finance in the ordinary course of operating the linked trading and finance accounts or those received on the Transfer, as monies received from the general public. The main purpose of clients like La Belle and Hubbard opening a finance account was to avail themselves of a revolving margin loan facility granted by Finance. In other words, they were mainly borrowing from and not lending to Finance. This was made clear in the Loan Agreement and the Facility Letter. If a transfer to a finance account has the effect only of reducing the client s indebtedness to Finance under the credit facility, this obviously cannot be the making of a deposit since it does not involve a loan of money but the repayment of a debt. It is true that there may be cases where a client who has traded profitably transfers monies surplus to his margin requirements from his trading account to his finance account, building up a credit balance which may be payable to him on demand. But it is impossible to see how receiving trading surpluses from such a client can qualify as receiving money from the general public. In my view, Mr Neoh was correct when he submitted that :- The services of [Finance] were not available to the general public but were provided only to clients of the Emperor Group after or contemporaneous with and ancillary to their entering into client agreements. (iv) The Transfer was not a loan or not one referable to the provision of services It is in any event highly questionable whether the ratified Transfer ever constituted a loan. Even if it did, it was, in my view, referable to the provision of brokerage services to La Belle. As indicated in paragraph 16 above, immediately before the Transfer, Hubbard had a debit balance of about $2 million in its finance account. In other words, it owed Finance $2 million. On the other hand, it had a credit balance of about $2.2 million in its trading account. It was therefore owed $2.2 million by Futures. As all its trading positions were closed, none of this credit balance was committed as margin and ordinarily, the cross-debts would have been used to offset each other. But when Madam Ng ratified the Transfer, the debt owed by Futures to Hubbard must be treated as having been extinguished and the proceeds credited to La Belle s finance account with Finance. It is not at all clear who ought to be considered the depositor in this case. If it was Hubbard, then there was no loan as Hubbard did not assert any right to its repayment. If, on the other hand, the depositor should be regarded as La Belle and if the ratification of the Transfer can be regarded as a loan by La Belle to Finance, then it was a loan referable to the brokerage services provided by Futures to La Belle in that the proceeds of the loan were to be used to fund La Belle s margin requirements, enabling Futures to provide the service of maintaining La Belle s open positions on the Exchange. It was therefore an excluded loan under paragraph (b)(ii) of the definition of deposit cited above. One might add that the Court of Appeal s statement that the plaintiffs transfer of the Hubbard money should be looked at on the basis that the plaintiffs cannot take the benefit of that deposit into the La Belle finance account appears to involve a misapprehension. There was never any question of the plaintiffs taking the benefit of the deposit. The beneficiary was La Belle and the sums were in fact used to meet La Belle s margin requirements to keep its open positions alive. As pointed out above, if the Transfer were to be reversed, the impact would be felt, not by Futures or Finance, but by La Belle in that its liabilities to Finance would be increased by the reversed amount. (v) Section 129(1) of the Banking Ordinance Section 129(1) reads as follows :- Subject to [immaterial exceptions], the contravention of any prohibition in this Ordinance ...... on the entering into of any contract shall not render that contract unenforceable. Finance relied on this provision, contending that any contravention of the Banking Ordinance did not preclude it from enforcing its contracts against the defendants. The Court of Appeal rejected the submission, holding :- ......it is clear that the wording of the section relates to contraventions of the Banking Ordinance on the entering into of any contract. In the present case, the contravention of the Banking Ordinance by taking deposits is not something which is spelt out or referred to in the documentation: it arises from the manner in which the accounts were operated. Section 129(1) therefore has no application to the breaches of the Banking Ordinance in this case. I am unable to agree. The power to make transfers from trading accounts to finance accounts was spelt out in the contractual documentation, more precisely in the Authorisation which made Finance the agent of its clients empowered, among other things, in its absolute discretion to :- ...... draw on [the client s] account with [Futures] ...... for any purpose and in any manner whatsoever ...... That power would be exercised by Finance in respect of surplus funds in the trading account to reduce a debit balance or to augment a credit balance in the finance account. Accordingly, if operating the accounts in such manner amounted to a contravention of the Ordinance, the relevant acts, ie, the transfers, were agreed to by the parties on the entering into of the relevant contracts, with the result that such contracts are not rendered unenforceable. (e) The Money Lenders Ordinance Having itself raised issues under the Money Lenders Ordinance, the Court of Appeal held, after hearing further submissions, that (i) there had been an incurable breach of section 20(1) so that the guarantees given by Madam Ng to Finance were unenforceable; (ii) that the memorandum required by section 18 was insufficient and in breach of sections 18(2)(d) and 18(2)(i); and (iii) that Finance was in breach of section 22(1)(c) which prohibits the charging of a higher rate of interest on default. As mentioned above, the question of a possible exercise of discretion under section 18(3) was ordered to be remitted for consideration by the judge at first instance. (i) The relevant provisions of the Money Lenders Ordinance Section 18(1) places certain obligations on money lenders in relation to a memorandum of the loan agreement, providing materially as follows :- Section 18(1) (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 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 mo 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. The relevant obligations of the money lender to a surety are to be found in section 20 :- Section 20 (1) A money lender who makes any agreement for the loan of money in relation to which secur ; 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), (3) ...... (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. The court is given a discretion in relation to enforceability by section 18(3) in relation to the principal loan and, where there has been a breach of section 18, in relation to any security taken :- Section 18(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. Section 22 makes certain contractual terms illegal, including the charging of increased default interest, giving the court a discretion as to enforceability :- Section 22 (1) Any agreement made for the loan of money by a money lender shall be illegal if it provides directly or indirectly for- (a) the payment of compound interest; (b) prohibiting the repayment of the loan by instalments; or (c) the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement: Provided that provision may be made by any such agreement that if default is made in the payment upon the due date of any sum payable to the money lender under the agreement, whether in respect of principal or interest, the money lender shall be entitled, subject to Part IV, to charge simple interest on that sum from the date of the default until the sum is paid at an effective rate not exceeding the effective rate payable in respect of the principal apart from any default, and any interest so charged shall not be reckoned for the purposes of this Ordinance as part of the interest charged in respect of the loan. (2) Notwithstanding subsection (1), if the court before which the legality of any agreement comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement which does not comply with this section should be held to be unenforceable, the court may order that such agreement is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable. (ii) Does section 18 apply to bodies corporate? In the Court of Appeal, the argument concerned the sufficiency of the Memorandum for the purposes of section 18. However, in this Court, relying on authorities from Australia and New Zealand, Mr Neoh contended in the first place that section 18 has no application at all where the loan is made to a corporation. This was a possible argument noted by Mr Bob Allcock in a valuable article ( The Money Lenders Ordinance (1981) 11 HKLJ 293 at 320-321) published shortly after the Ordinance was enacted in Hong Kong. In Re British Games Ltd [1938] Ch 240, Simonds J had assumed that the English equivalent to our section 18, namely, section 6 of the Moneylenders Act 1927, applied to corporate borrowers, holding that a signature by a director and the secretary for and on behalf of the company was sufficient to meet this requirement. However, in Motel Marine Pty Ltd v I A C (Finance) Pty Ltd (1964) 110 CLR 9, the High Court of Australia had to construe the Lending of Money Act 1915 (Tasmania), section 13 which, like our section 18, made a money lender s contract unenforceable unless a note or memorandum in writing of the contract is made and signed personally by the borrower . A strong majority (Dixon CJ and Kitto, Taylor and Owen JJ) concluded that this language excluded signature by an agent and, since companies could only act through agents and not personally , that the legislature had accordingly not intended the word borrower in that section to extend to corporations. Menzies J, dissenting, was of the view that a company could comply by affixing its seal on the document in accordance with its constitution. The majority decision was followed in Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265 at 280 and, in New Zealand, in Re Mountain View Property Ltd [1972] NZLR 1 and in Re Securitibank Ltd [1978] 1 NZLR 97, where section 8 of the Moneylenders Amendment Act 1933 was in similar terms. There is accordingly substantial persuasive authority in support of Mr Neoh s argument. However, putting such authority to one side for the moment, I have to say, with respect, that I find the conclusion that insertion of the word personally results in the exclusion of all corporate borrowers from all the section 18 protections surprising. The Ordinance nowhere states that section 18 is inapplicable to corporations, unlike, for instance, section 3 of the Money Lenders (Amendment) Act 1959 (Vict) which provides that the Act does not apply to any loan made to any body corporate (see Ocean Road Motel Pty Ltd v Pacific Acceptance Corp Ltd (1962-1963) 109 CLR 276). On the contrary, it is clear that in Hong Kong the Ordinance does apply to corporations generally. Thus, Schedule 1, Part 2 contains exemptions for :- loans made to a company secured by a mortgage, charge or lien or other encumbrance registrable under the Companies Ordinance (para 2); loans made by a holding company to its subsidiary or vice-versa (para 10(a)); loans made to a company where the loan is for the purpose of facilitating the export or import of goods or services (para 11); and loans made to companies with a paid up share capital of not less than $1,000,000 (para 12(a)). It is notable that since the year 2000, there has also been a general exemption for corporations licensed under Part V of the Securities and Futures Ordinance (Cap 571) to carry on a business in securities margin financing: Money Lenders Ordinance, Schd 1, Pt 1, para 10 an exemption relevant to, but too late to benefit, the plaintiffs in the present proceedings. Secondly, section 18 is at the core of the protection given by the legislation and imposes three obligations on money lenders : (i) to make a memorandum containing the salient terms of the loan; (ii) to obtain the borrower s signature on the memorandum; and (iii) to give the borrower a copy. The effect of the Motel Marine line of cases is to relieve money lenders of all three obligations vis- -vis corporate borrowers on the sole ground that companies cannot sign personally . This undifferentiated and sweeping result appears unjustified. Even if a company is considered unable to sign the memorandum personally , it is hard to see why it should be deprived of the protection of obligations (i) and (iii), both of which represent basic safeguards which are perfectly capable of operating in relation to corporations. Thirdly, this exclusion of corporate borrowers from the section 18 protections is odd since a corporate surety of an individual s loan clearly has a right under section 20 of the Ordinance to be given, inter alia, a copy of the section 18 memorandum, the security being made unenforceable if there is non compliance. If a corporate surety merits this protection, why not the corporate borrower who assumes primary liability? In Motel Marine, the policy justification for excluding corporations from the section was explained as follows by Dixon CJ :- ...... it is part of a set of provisions directed to the protection of borrowers who are natural persons and subject to the possibility of being over-reached in their indigence or necessities by persons possessing the persuasive force of greater money power and engaged in profiting by the lending of money. It is not directed to the protection of fictitious persons from the possibility of their directors or boards of management misunderstanding an ordinary business transaction or an extraordinary business transaction for that matter. In my view, the premise that companies boards of directors can be expected to have no difficulty understanding ordinary or even extraordinary business transactions cannot safely be accepted in Hong Kong. Experience in our courts tends to show that in all sorts of contexts, companies are set up which are wholly-owned and operated by individuals who lack commercial, financial and legal sophistication and are likely to be vulnerable to exploitation by unscrupulous money lenders. Such persons might, for example, be persuaded to accept loans on behalf of their companies for investment or speculative purposes and personally guarantee the corporate debt. It is equally desirable that the safeguards of section 18 should be applicable in such cases. This is reflected in Schd 1 Pt 2. Apart from the specified types of commercial loans (such as those secured by the giving of registrable securities, intra-group loans and trade financing loans), only loans to companies having a paid up capital of at least $1 million are exempt. The protections are therefore generally intended to apply to less substantial or commercially experienced companies. If companies are excluded from section 18, then the section 20 protection intended for sureties (whether corporate or individual) becomes deficient. The money lender is only required by that section to give the surety a copy of the memorandum required by section 18. Since no such requirement would apply to a corporate loan, the elementary safeguard of the surety being given a signed copy of the memorandum setting out the terms of the loan to the principal debtor would be missing. Application of the Motel Marine line of cases in the context of Hong Kong would therefore have unsatisfactory consequences and in my view, those authorities should not be followed in this jurisdiction. The Motel Marine approach rests on three propositions, namely :- that the requirement that the memorandum be signed personally by the borrower means that it must be the borrower himself who signs and not his agent; that a company, being an artificial person, is unable to sign by itself and must always sign by an agent; and, that since section 18 should not be construed as intending to impose an impossible condition of enforceability on money lenders, it must be construed as not extending to loans made to companies. The first proposition, namely, that signed personally excludes signature by an agent, is well-established and should not be disturbed: see, eg, The Queen v Justices of Kent (1873) LR 8 QB 305, 307; In re Whitley Partners Ltd (1886) 32 Ch D 337; and In re Prince Bl cher [1931] 2 Ch 70. However, in the light of more recent developments in the case-law, the second proposition (based on decisions like Ferguson v Wilson (1866) LR 2 Ch App 77 at 89) may now be regarded as excessively narrow. It is of course true that a corporation is an artificial person and cannot physically append a signature to a document. However, the courts have been increasingly willing to construe statutory language which on its face may be thought to require personal acts or states of mind as applicable to corporations notwithstanding their status as artificial persons. This may be illustrated by contrasting the decisions of the English Court of Appeal in Hirst v West Riding Union Banking Company Limited [1901] 2 KB 560, and in UBAF Ltd v European American Banking Corp [1984] 1 QB 713. Both cases concerned section 6 of the Statute of Frauds Amendment Act 1828 (Lord Tenterden s Act) which makes it a condition of making a person liable for a representation he made regarding the credit of another person that the relevant representation was made in writing signed by the party to be charged therewith . In Hirst, the representation was in a letter signed by the branch manager of the defendant bank and the court evidently assumed that this could not be equated with the bank s own signature so that the action against the bank was not maintainable. In UBAF, some 80 years later, the issue was whether the signature of the defendant bank s assistant secretary on the relevant documents could, as a matter of law, constitute the signature of the party to be charged within the meaning of the section. On the facts, it was held that the actual authority of the assistant secretary required factual investigation. However, Ackner LJ, giving the judgment of the Court, addressed :- ...... the important question raised ...... in the court below and decided adversely to the plaintiffs, namely whether a representation signed on behalf of a limited company by a properly authorised officer or employee acting in the course of his duties in the business of the company constitutes the company's signature for the purposes of section 6. (at 720) His Lordship commented that an affirmative answer makes to us such obvious commercial sense, we would view with respectful surprise any authority which obliged us to take the contrary view. The judge below had considered Hirst to be such an authority, but the Court of Appeal concluded that Hirst had proceeded on the basis of an unreasoned assumption which was not dictated by the authorities. Ackner LJ continued :- The law relative to corporate activities has developed considerably over the years and cannot be taken to have stood still all this time. Parliament is continually placing the obligation on corporate bodies to serve notices in writing of one kind or another and, in the case of local authorities, has expressly provided for such documents to be signed by the proper officer: section 234(2) of the Local Government Act 1972. Since a company, not being a physical entity, can only act in relation to the outside world by its agents, no one nowadays would question that the signature of the duly authorised agent of the company, acting in the course of the company's business, is the signature of the company. Take as a simple, yet frequent, example, the statutory notice of termination of a tenancy given by a company landlord under section 25 of the Landlord and Tenant Act 1954. While there may always be questions as to the authority of the agent who purported to sign the notice, given that he had the company's authority to give such notices and was doing so in the course of his duties in the business of the company, no one would nowadays question that his signature is to be taken as the signature of the company. We do not, therefore, find any impediment in authority against deciding, and we think that it should now be decided, that the signature on behalf of a company of its duly authorised agent acting within the scope of his authority is, for the purpose of section 6 of Lord Tenterden's Act, the signature of the company. (at 724) The UBAF case proceeded on the footing that the act of an agent was sufficient for the purposes of section 6 of Lord Tenterden s Act. However, the courts increasing willingness to impute the acts and mental states of natural persons to corporations does not rest solely on the law of agency. They have reached the same result applying the directing mind and will doctrine. That doctrine, which has been applied in both civil and criminal cases, originated in Lennard s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, where Viscount Haldane LC stated :- My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company. (at 713) As Eveleigh J pointed out in R v Andrews-Weatherfoil Ltd [1972] 1 WLR 118 (CA), the doctrine makes it :- ...... necessary to establish whether the natural person or persons in question have the status and authority which in law makes their acts in the matter under consideration the acts of the company so that the natural person is to be treated as the company itself. (at 124) As appears from the passage cited above, Viscount Haldane LC identified such persons as members of the corporation s constitutional organs or persons on whom those organs conferred sufficient status and authority to qualify as the corporation s directing mind and will. In Tesco Supermarkets v Nattrass [1972] AC 153, Lord Diplock approached that question in the following terms :- My Lords, a corporation incorporated under the Companies Act 1948 owes its corporate personality and its powers to its constitution, the memorandum and articles of association. The obvious and the only place to look to discover by what natural persons its powers are exercisable, is in its constitution. The articles of association, if they follow Table A, provide that the business of the company shall be managed by the directors and that they may "exercise all such powers of the company" as are not required by the Act to be exercised in general meeting. Table A also vests in the directors the right to entrust and confer upon a managing director any of the powers of the company which are exercisable by them. So it may also be necessary to ascertain whether the directors have taken any action under this provision or any other similar provision providing for the coordinate exercise of the powers of the company by executive directors or by committees of directors and other persons, such as are frequently included in the articles of association of companies in which the regulations contained in Table A are modified or excluded in whole or in part. In my view, therefore, the question: what natural persons are to be treated in law as being the company for the purpose of acts done in the course of its business, including the taking of precautions and the exercise or due diligence to avoid the commission of a criminal offence, is to be found by identifying those natural persons who by the memorandum and articles of association or as a result of action taken by the directors, or by the company in general meeting pursuant to the articles, are entrusted with the exercise of the powers of the company. (at 199-200) El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, is a recent example where the doctrine s operation was considered in the context of asking whether, for the purposes of imposing a constructive trust, a company could be regarded as having knowingly received the proceeds of a fraud. Hoffmann LJ pointed out (at 705) that it was a doctrine which distinguishes between someone who is merely a servant or agent and someone whose action (or knowledge) is that of the company itself. As to who should be treated as the directing mind and will of the company, his Lordship cited the Lennard s Carrying case, pointing out that Viscount Haldane regarded the identification of the directing mind as primarily a constitutional question, depending in the first instance upon the powers entrusted to a person by the articles of association. His Lordship considered however that additionally :- ...... the position may have to be supplemented by looking at the actual exercise of the company s powers. A person held out by the company as having plenary authority or in whose exercise of such authority the company acquiesces, may be treated as its directing mind. (at 705) Nourse LJ agreed (at 696) that to establish the requisite status and authority, the formal position, as regulated by the company s articles of association, service contracts and so forth, though highly relevant, may not be decisive and that the matter had to be approached pragmatically. Rose LJ (at 699) also agreed and added that a company s directing mind and will may be found in different persons for different activities of the company (a proposition with which Hoffmann LJ agreed (at 706)). In my view, the directing mind and will doctrine enables section 18 to be construed as applying to bodies corporate without doing violence to the words signed personally . Where, adopting the criteria mentioned above, a natural person qualifies as a corporation s directing mind and will, his act of signing a money lender s memorandum should in law be imputed to the corporation directly and so satisfy the section 18 requirement. Such a person would not be regarded for this purpose as acting merely as the corporation s agent but signing as the corporation itself which is no different from saying as the corporation signing personally . The requirement that the memorandum be signed personally would continue not to be fulfilled if a mere agent (who does not qualify under the directing mind and will doctrine), say, the company s solicitors or an employee having no special authority, were to purport to sign on the company s behalf. Such a signature could not be regarded as the personal signature of the company. Accordingly, while the courts should approach the requisite status and authority of the person signing pragmatically, it would be prudent for money lenders contemplating a loan to a corporate borrower to obtain the signature of at least one director of the corporation backed by a resolution of the board (which could no doubt be drawn in a standard form) duly authorizing signature of the memorandum by that director in accordance with the company s articles, to ensure that the signature obtained properly qualifies as the company s own signature under section 18(1). In the light of the abovementioned Australian and New Zealand cases, noted academically in Hong Kong, it is likely that money lenders will have made loans to corporate borrowers which may still be current in the belief that section 18 does not apply and so without complying with its requirements. In such cases, during what one might call a reasonable transitional period, in the absence of any independent reason for treating the loan as unenforceable, the court should exercise its discretion under section 18(3) in favour of enforcing those transactions and any security given, notwithstanding failure to comply with section 18. In the present case the memorandum was in each case signed by Madam Ng within the respective chops of La Belle and Hubbard affixed at the foot of the document. She provided Finance with a certified copy of a board resolution which, while authorizing the signing of the various contractual documents, did not authorize signing the relevant memorandum. However, Madam Ng was a director and owner of all but one of each company s issued shares. She undoubtedly beneficially owned and controlled both companies and is to be regarded in law as representing the directing mind and will of each of them. Accordingly, there was no breach of section 18(1) of the Ordinance in respect of the $1 million credit facility as the requirement for a memorandum signed personally by the borrowing companies was met. (iii) Is there a breach of section 18(2)(d)? Section 18(2)(d) makes it a requirement that :- The note or memorandum shall contain all the terms of the agreement and in particular shall set out ...... the amount of the principal of the loan in words and figures. The relevant paragraph of the Memorandum states :- The amount of the principal of the loan in words and figures : Loan or loans not exceeding HK$1,000,000.00 (Hong Kong Dollars One Million Only) ( the Loan) The Facility clause in the Facility Letter states as follows Facility: A maximum aggregate limit of HK$1,000,000.00 being a revolving margin loan facility line ( the Credit Limit ). The Facility may be repaid and reborrowed in whole or in part provided that the total amount outstanding from you to us together with the interest thereon shall not exceed the Credit Limit. We reserve the right to increase or reduce the Credit Limit at any time in our sole discretion. (Italics added) Mr John Griffiths SC, appearing with Mr Kenneth C L Chan for the defendants, submitted that the italicised words rendered uncertain the amount of the loan principal and therefore made the Memorandum insufficient for the purposes of of section 18(2)(d). I do not agree. On the true construction of the Facility Letter, the principal amount of the loan was $1 million, representing the maximum amount that could be drawn thereunder (to be utilised on a revolving basis). That amount was duly shown in words and figures so that the Memorandum was not deficient in this respect. The italicised words do not alter or render uncertain the amount of the loan then established but refer to potential future variations, involving fresh loans increasing or reducing that credit limit. However, Finance faces a serious difficulty, not under section 18(2)(d), but under section 18(1). As we have seen, Finance permitted adequately secured borrowers to exceed the agreed credit limit so as to fund excess margin requirements needed to preserve open positions held with Futures. The granting of such additional credit would constitute the making of additional loans which attracted obligations under section 18. But it was no doubt quite impracticable to execute a fresh section 18 memorandum each time before the credit limit was so exceeded. However, absence of a memorandum made those additional loans prima facie unenforceable. This is no longer a problem where the finance company is able to secure registration under Part V of the Securities and Futures Ordinance so as to qualify for the exemption provided by Schd 1, Pt 1, para 10 of the Money Lenders Ordinance. However, at the time relevant to these proceedings, no such exemption was available. The amounts claimed by Finance, in the sums of $3,018,952.73 and $1,194,948.55, represent claims for loan principal granted to La Belle and Hubbard in excess of the $1 million credit limit agreed in each case. Those additional loans were unsupported by section 18 memoranda and therefore involved breaches of 18(1). Accordingly, subject to discretionary considerations, approximately $2 million of the claim made in La Belle s case and some $194,000 in Hubbard s case represent claims to balances of unenforceable loans. (iv) Is there a breach of section 18(2)(i)? Section 18(2)(i) relevantly provides that :- The note or memorandum shall contain all the terms of the agreement and in particular shall set out the rate of interest charged on the loan expressed as a rate per cent per annum ...... Interest is dealt with in several of the documents signed with Finance. Clause 2(1) of the Loan Agreement provides that :- The Client undertakes to pay interest to [Finance] in respect of any amount owing to [Finance] at such rate as may be stipulated from time to time by [Finance] or failing such stipulation at the rate equivalent to three per cent. per annum above the best lending rate of The Hongkong and Shanghai Banking Corporation Ltd from time to time. The Facility Letter states :- The rate of interest on the loan(s) shall be 3% per annum over the best lending rate quoted by the Hongkong and Shanghai Banking Corporation Limited or at such rate as from time to time agreed between the Lender and the Borrower on the outstanding balance of the loan(s) during the term of the loan(s) payable on demand. The Memorandum, para i., is in the following terms :- The rate of interest charged on the loan expressed as a rate per cent per annum : 3% per annum over the best lending rate quoted by the Hongkong and Shanghai Banking Corporation Limited or at such rate as from time to time agreed between the Lender and the Borrower. It was argued by the defendants that there was a breach of section 18(2)(i) because the interest rate, as set out in clause 2(1) of the Loan Agreement, is wholly uncertain and left at large, being such rate as might be specified by Finance from time to time. The amount shown in the Memorandum was therefore inaccurate and the loan falls foul of section 18(2)(i). I do not accept that argument. As a matter of construction, the parties plainly intended the Loan Agreement to be read together with the Facility Letter, the latter document stipulating the rate (at 3% above the HSBC best lending rate) as envisaged by clause 2(1) and agreed to by La Belle and Hubbard (who signed at the foot of the Facility Letter). That rate is reproduced in the Memorandum. 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. The Court of Appeal held, however, in my view correctly, that section 18(2)(i) was breached in a different manner. Finance expressed the interest rate as 3% above the HSBC best lending rate and therefore failed to set out the rate of interest charged on the loan expressed as a rate per cent per annum. The wording of section 18(2)(i) does not accommodate use of such floating rates. The policy of section 18 is to ensure that potentially unsophisticated borrowers are left in no doubt as to how much money exactly they are borrowing by way of principal and what interest they will have to pay on that loan, to which end, such information has to be set out and expressed in the prescribed manner in the memorandum to be signed by the borrower. An interest rate of 3% above the HSBC best lending rate does not comply with this requirement. The rate is not 3% per annum, but 3% over the unexpressed interest rate per cent per annum reflecting the HSBC best lending rate over the period in question. Moreover, it is a rate which obviously changes as the HSBC best lending rate changes. It is therefore not capable of being expressed as a definite rate per cent per annum at the time of signing the Memorandum. It is true, but irrelevant, that the HSBC best lending rate is ascertainable with relative ease and is a perfectly reasonable rate of interest upon which to base interest charges, favouring the borrower if that rate falls. In the context of money lender protections, it is not to be assumed that the borrower would have access readily or at all to what such a rate is at any one time. Moreover, a rate which fluctuates may make it difficult for the borrower to compute the interest payable since different rates for different periods would have to be applied. More fundamentally, the borrower could not know when taking the loan exactly what rate of interest he will be charged over the life of the loan. This construction of section 18(2)(i) could cause difficulties to some money lenders by preventing them from charging interest at floating rates which may be thought to be commercially desirable. It must, however, be recognized that the Ordinance s policy of protection necessarily involves placing constraints on the way money lenders do business. They are not licensed banks and are not subject to the same prudential and regulatory requirements and so cannot expect to enjoy all the commercial advantages of banks. In practice, money lenders like Finance may be able to claim exemption after obtaining registration under Part V of the Securities and Futures Ordinance and may therefore be able to operate using reasonable floating interest rates. Others, who do not fall within any generally exempted class but wish to use such rates and can show that this would be commercially justifiable and unobjectionable, may find that applications for specific exemption under section 33B of the Ordinance could avail them. But where such exemptions are unavailable, the policy of the Ordinance is to exclude use of floating rates. (v) Is there a breach of section 20(1)? The Court of Appeal held that Finance was in breach of this section because, although it gave a set of the stipulated documents to Madam Ng who signed the Memorandum acknowledging receipt, she received them for the companies and was not given separate copies in her individual capacity of guarantor. Rogers VP held that this was a breach with particularly serious consequences for the money lender first, because it was not a curable breach; and secondly, because a court has no discretion to enforce the security if the provisions are contravened. I am unable to agree. The requirement imposed by section 20(1) is to give to the surety copies of the section 18 memorandum, of the security instrument, if any, and of a signed statement from the money lender giving details of the loan. Whether a surety was or was not given these documents is a question of fact. Here, Madam Ng, who was the directing mind of the principal debtor companies, was plainly given a set of the documents. There is nothing in the section that requires the court to disregard that fact simply because she can be regarded as having received them in two capacities, ie, as surety and as corporate borrower. There was accordingly no breach of section 20(1). Although, given this conclusion, the question does not arise, it is my view (subject to what is said about section 18 breaches below) that if there had been a breach, it would not have been incurable. Rogers VP, who took a contrary view, 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. Section 20(4) states :- If a money lender fails to comply with subsection (1) ...... he shall not be entitled, while the default continues, to enforce the security so far as provided in relation to the agreement. Section 20(4) is therefore expressly dealing with breaches of 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. 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. 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. Section 18(3) states :- 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. Since, as indicated above, it is my view that the Memorandum is rendered insufficient by breaches of section 18, the section 18(3) discretion arises in respect of enforcing both the principal debt and Madam Ng s guarantee in the present case. Rogers VP s statement that the court has no discretion to enforce the security in cases of non-compliance with section 20 plainly requires qualification and is incorrect in the present context. (vi) Is there a breach of section 22(1)(c) Although a finding was not explicitly made, that the Court of Appeal apparently considered Finance to have been in breach of section 22(1)(c) which prohibits the charging of a higher rate of interest on default. Rogers VP stated :- ...... under section 22(1)(c), the interest may not be increased by reason of any default in the payment of sums due. In this respect it is pertinent to note not only the fact that the rate of interest charged by the 2nd plaintiff was arbitrarily increased for the period from 29 October 1997 to 8% above the HSBC best lending rate, but the claim initially made by the plaintiffs included that increased interest rate and indeed the capital amount claimed was calculated on the basis of that increased interest rate. As noted above, when the amendment was made to abandon that part of the claim, no explanation was provided other than that the amendment was on the advice of counsel. There was in fact no evidence of any such breach. The contractual documentation did not provide for charging a higher rate of interest as default interest. While the Facility Letter has a clause dealing with default interest, its effect is merely to impose the ordinary rate of interest (3% above the HSBC best lending rate) on post-default unpaid balances. Nor did Finance ever purport to charge the defendants any default interest at a higher rate. It is true that, as Rogers VP pointed out, Finance increased the interest it charged to 8% above the HSBC best lending rate during a certain period commencing on 29 October 1997. However, the unchallenged evidence of Ms Fan was that :- ...... banking interest rates in Hong Kong, especially the inter-bank rate, suddenly shot up dramatically with the result that the finance costs of the Plaintiffs, all of sudden, became almost unmanageably expensive. To cope with this crisis, the Plaintiffs sent out letters on 27th October 1997 to all its clients, giving notice that the rate of interest charged on all accounts in debit would be increased by 5% per annum as from 29th October 1997. It was therefore not an increased interest rate charged by reason of a default in the payment of sums due under the agreement but an increase in the ordinary interest rate. (vii) The court s discretion under section 18(3) By way of summary, it is my view that Finance committed two breaches of the Money Lenders Ordinance, namely :- breach of section 18(1) in failing to prepare, provide or obtain the borrowers signature on a memorandum in respect of the loans made over-topping the $1 million credit facility in each case; and, breach of section 18(2)(i) in that adoption of an interest rate of 3% above the HSBC best lending rate involved a failure to set out the rate of interest charged on the loan expressed as a rate per cent per annum. The question which therefore arises is whether the Court should exercise its discretion under section 18(3) to permit Finance to enforce its claims, wholly or in part, and with or without modification, against La Belle, Hubbard and, under the guarantees, against Madam Ng. This discretion can only be exercised if the court 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 of Appeal took the view that the La Belle action had to be remitted to the judge to determine whether La Belle should be allowed to amend its pleadings so as to permit consideration of a possible exercise of the court s discretion under section 18(3). I do not consider that course necessary. The amendments are, at this stage, matters of formality. Submissions were made at the hearing on the exercise of discretion and this Court, having all the materials necessary to deal with the matter, should do so at once. 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. In my judgment, it is clear that upholding unenforceability in this case would be inequitable and accordingly that the Court s discretion should be exercised in Finance s favour so that its claims against La Belle, Hubbard and Madam Ng are enforceable in full. In relation to the first breach, involving section 18(1) and the over-topping credits :- On the basis of the Judge s findings which have never been disturbed, the excess credit was granted and the funds consumed in meeting the Exchange s margin requirements as a result of Madam Ng s insistence on maintaining La Belle s 21 open positions. Madam Ng could, at any time, have closed those positions and thereby prevented or stopped the build-up of debt on her finance account. But she chose not to do so, trusting her own judgment of the market. While she did not receive statutory memoranda setting out the terms upon which such additional credit was given, such credit was extended on the same terms as applied to the documented $1 million loans and there has been no suggestion that Madam Ng was in any way misled about or uncertain as what those terms were. Madam Ng received daily statements showing the precise status of her finance and trading accounts and therefore was in fact kept informed as to her financial position vis- -vis Finance after each trading day. The statutory policy is now to permit corporations licensed to carry on a business in securities margin financing under Part V of the Securities and Futures Ordinance to be exempt from the requirements of the Money Lenders Ordinance, which may be interpreted as recognition that there is room for easing some of the constraints posed by the legislation on the provision of finance for properly regulated margin trading activities. Similar considerations apply in respect of the second breach. In particular, while the Memorandum, by using a floating rate, failed to satisfy the requirements of section 18(2)(i), the amount of interest charged was in fact calculated and stated in dollars and cents in the statements Madam Ng received on a daily basis. (f) Conclusion I would accordingly allow this appeal and set aside the judgment of the Court of Appeal in respect of Finance, restoring the orders made by Deputy Judge Poon in favour of Finance. I would also make an order nisi that Finance have the costs of this Appeal and in the Court of Appeal. I would also give the following directions :- Any representations with a view to varying the costs order nisi should be made in writing and filed with the Registrar of the Court and served on the other side within 14 days of the date when this Judgment is handed down. In the event that any representations are filed, the other party should file and serve any representations in reply within 14 days of being served. The Court will then hand down in its written determination as to costs unless it is of the view that oral representations or further written submissions are required. In the event that no representations are filed within 14 days of the handing down of the Judgment, the aforesaid order as to costs shall automatically become absolute. The parties have liberty to apply to a single Judge of this Court for the purposes of implementing this order. Mr Justice Litton NPJ: I agree with Mr Justice Ribeiro PJ s judgment, and would add only a few words regarding the Court of Appeal s reversal of Deputy Judge Poon s findings of primary fact. Deputy Judge Poon had clearly made a careful evaluation of the evidence, and in particular the change in Mr Lee s stance regarding the mistaken transfer of $2,233,522.50 from Hubbard s trading account to La Belle s finance account. In overturning the trial judge s findings, the Court of Appeal focussed on his remark to this effect : That, in the light of the settlement clerk s evidence, he did not need to deal with the shift in Mr Lee s evidence further. Had the judge actually stopped there, then perhaps there might have been cause for concern on the appeal, for the settlement clerk s evidence did no more than acknowledge that a clerical mistake had been made : It did not deal with the point as to whether the transfer was authorized or ratified. But, as is clear from the pages following this remark, the judge did in fact deal further with that point. This was, as Mr Justice Ribeiro PJ has pointed out in his judgment, in a sense inevitable because Madam Ng s subsequent conduct (after the error was discovered) was highly relevant to the question whether Mr Lee was speaking the truth when he said that Madam Ng was content for the money to stay in La Belle s finance account. The Court of Appeal s analysis of the judge s findings was, with respect, too narrowly focussed. If one stepped back and looked at the wider picture, the story becomes clear. Madam Ng was taking a gamble that the market was going to turn in her favour. In evidence she did say that she had wanted the money to be transferred back to Hubbard to enable Hubbard to enter into sell contracts : If this had been accepted it might have given some credence to her assertion. But this piece of evidence was disbelieved by the trial judge, and there was no challenge to this finding in the Court of Appeal. This was, in any case, not the full story : By the end of trading on Friday 17 October 1997, the unrealized loss in La Belle s account was well in excess of the credit limit of $1 million, and if the $2,233,522.50 had been taken out of that account there would have been an immediate margin call on La Belle. So the picture emerges thus : Despite the falling market Madam Ng wanted her positions kept open in the La Belle account : This could only have been done if the $2,233,522.50 had remained in that account to sustain the margin requirements. In any case, the change in the plaintiffs case was not as fundamental as the Court of Appeal had thought : La Belle and Hubbard were Madam Ng s trading entities, and she was the guarantor on both corporate accounts. It made no practical difference to the parties where precisely the liability was owed. The transfer only became significant when the Court of Appeal held that Emperor Finance Ltd was engaging in the business of banking and of taking deposits in breach of ss.11(1) and 12(1) of the Banking Ordinance : A point far removed from the minds of the parties in October 1997, and in any case thoroughly bad, for the reasons explained in Mr Justice Ribeiro PJ s judgment. As I see it, the inherent probabilities, arising from the undisputed evidence and the judge s findings of primary fact, all tended to support the plaintiffs version of events. There was no warrant for the Court of Appeal s interference with the judge s conclusions. I concur in the orders proposed in Mr Justice Ribeiro PJ s judgment. Lord Millett NPJ: I also agree with the judgment of Mr Justice Ribeiro PJ. Mr Justice Bokhary PJ: This Court unanimously allows the appeal, sets aside the judgment of the Court of Appeal in relation to the Appellant and restores the orders made by the Deputy Judge in favour of the Appellant. This Court also unanimously makes the order nisi as to costs and gives the directions set out in paragraphs 123 and 124 of Mr Justice Ribeiro PJ s judgment. (Kemal Bokhary) Permanent Judge (Patrick Chan) Permanent Judge (R A V Ribeiro) Permanent Judge (Henry Litton) Non-Permanent Judge (Lord Millett) Non-Permanent Judge Mr Anthony Neoh SC and Mr Denis Gordon Yu (instructed by Messrs Fred Kan & Co) for the Appellant Mr John Griffiths SC and Mr Kenneth CL Chan (instructed by Messrs Hau, Lau, Li & Yeung) for the Respondents PAGE X (# V`]#& 0B($ GF@% bt 0 roL& uAQN V.IT ,.5X jM[& $/h& 9sp8 t|u& U)gy i/){v GF@% V.IT U)gy bt 0 ,.5X V`]# 0B($ i/){ R"{F FACV No Erica FY Wong Normal.dot setup Microsoft Word 9.0 Judiciary Hong Kong FACV No Title Microsoft Word Document MSWordDoc Word.Document.8