Introduction
From 2017 to 2021, the number of licensed money lenders in Hong Kong has increased from 1,994 to 2,490. The ensuing business expansion has resulted in a series of recent court cases highlighting the serious consequences for failing to comply with the Money Lenders Ordinance (Cap 163) (“MLO”), which primarily make the relevant loan agreements unenforceable or the outstanding debts not recoverable.
The following are some court cases that highlight the key statutory requirements and ancillary enforcement issues applicable to money lending transactions.
Making use of licensing exemptions: a tricky fallback
A money lender must obtain a license in accordance with the MLO, unless the lender is an exempted person, or it makes loans that are exempted, as respectively stipulated in Parts 1 and 2 of Schedule 1 of the MLO. Furthermore, whether exempted or not, money lenders must heed to the statutory requirements to ensure that their claims will be upheld by the courts.
Whether carrying on the business of making loans: frequency not decisive
A single loan could expose the lender to the licensing requirement under MLO. In the most recent case of Wealthy Land Investments Group Ltd v Florescent Holdings Ltd [2022] HKCFI 649, the court rejected the creditor’s winding up petition against the borrower on the ground that, amongst other things, the debt being the only loan ever made by the creditor does not displace an arguable case that the creditor is carrying on money lending without a license, which if proven would render the loan and supporting security unenforceable.
In this regard, the MLO defines a “money lender” very broadly to mean “every person whose business is that of making loans, or … holds out himself in any way as carrying on that business”, regardless of whether he also carries on any other business.
Exemption for loans with registrable security
This exemption requires a loan security that is registrable under the Companies Ordinance (Cap. 622) (“CO”). Alternatively, if security is provided by a non-Hong Kong company, such security must be registrable under the CO as if the company were incorporated in Hong Kong.
There are practical difficulties with this exemption, when the charge is created over shares (which per se is not a registrable security under the CO). In Wealthy Land, the lender argued that a charge over the shares in a listed company constitutes a floating charge on the borrower’s undertaking or property, as specified under section 334 of the CO. However, the contractual restrictions over the borrower’s freedom to deal with the charged shares, while typical for the lender’s protection, are inconsistent with the defining feature of a floating charge. This is a fact-sensitive exercise: the court looks at the nature of the rights and obligations the parties intended to grant each another over the charged asset when the security was created, and then, in accordance with settled law, categorizes the security as either fixed or floating.
In addition, certain types of commonplace security are not registrable and could not benefit the lender from the licensing exemption. For example, a charge over a bank account is not registrable, because this is not regarded as a charge on book debts of the company under s334(3)(d) of the CO.
Ordinary course of business exemption
At first blush, this exemption is somewhat confusing in its formulation, referring to loans “made by a [lender] whose ordinary business is not primarily money lending, in the ordinary course of that business” under paragraph 5 Part 2 Schedule 1 of the MLO. Put another way, the exemption refers to loans which are ancillary to the ordinary business of the lender.
The lender in Wealthy Land, being an investment holding company, also attempted unsuccessfully to invoke this exemption. The court held the loan was not part of or ancillary to its investment holding business, but an entirely separate activity, because the nature and amount of income generated from a loan as opposed to equity holding are categorically different.
On the other hand, Hong Kong Property Services (Agency) Ltd v Chan Yuen Wa [2006] HKCU 1946 demonstrates how the exemption could be invoked. The lender, acting as the estate agent of a property developer, paid the developer on behalf of the borrower purchaser. The District Court accepted that the lender, as an estate agency, did not charge interest on the loan. As a result, the loan could have only been advanced to assist, advance or preserve the lender’s primary business as estate agent to introduce buyers for property developers and facilitate the relevant sale and purchase transactions.
Licensing implications, statutory restrictions and enforcement issues
The MLO imposes numerous restrictions on lending arrangements, some applicable to licensed money lenders only and some to all money lenders.
Formalities of agreement: s18 MLO
A loan agreement is only enforceable if it is evinced in writing, signed personally by the borrower within 7 days of making the agreement. The agreement must contain all the material terms, particularly a declaration on the place of negotiation and completion of the agreement.
The courts took a strict view to these formalities. In Shun On Finance v Wong Fung Kwan and Anor [2022] HKDC 240 the loan agreement was held unenforceable, for incorrectly stating the place of negotiation and completion was the office of the lender or its solicitors, whereas there was no evidence the borrower attended such office, or there being direct negotiation between the lender and the borrower. The courts have previously recognized that using email and telephone at the lender’s office as the modern way of business transaction, but it appears that at least part of the negotiations should have taken place at the lender’s office in order to satisfy s7 of the MLO.
In practice, money lenders may invite intended borrowers to attend their office at the beginning, to collect their personal data for standard Know Your Client checks. Parties can take that opportunity to discuss the loan agreement terms, in compliance with s7. In addition, money lenders may make reference to the sample form under Licensing Condition 5 of the Guidelines on Licensing Conditions of Money Lenders License, for recording the names of the parties, and the date, time and venue of the negotiations .
If the parties need extra time to prepare and sign documents, the loan agreement should be updated to reflect the actual date of signature to avoid falling foul of s18. Vinson Finance Ltd v Chu Qingzhu and Anor [2022] HKCFI 449 clarified it is no defense for the lender to argue the borrower cannot rely on s18(2), just because they eventually signed the backdated loan agreement – the social policy behind the MLO regulatory regime trumps any rules of evidence.
Under s18(3) of the MLO, the court has discretion to remedy an otherwise unenforceable agreement, but such discretion will only be exercised where it would be inequitable not to. In Shun On Finance, the lender’s failure to conduct direct negotiations with the borrower is aggravated by the fact that the borrower was referred to the lender through a broker new to the lender without much due diligence conducted, thus exposing the borrower – quite often unsophisticated average individuals such as in the present case – to the risk of being scammed. Indeed, the broker later stole the entire loan proceeds from the borrower on the pretense of using it as “guarantee money” to secure for the borrower a mortgage with lower interest from a bank. As a result, the court ruled that the lender was about 2/3 culpable, and could only enforce the loan for the remaining 1/3 of the principal amount. In Vinson Finance, which was an application for summary judgment, the court declined to exercise the discretion at that stage because the circumstances around the signing of the loan documents were in dispute.
Extortionate rates: s24 MLO
Whether or not a loan is exempted from the licensing regime, it is illegal for a money lender to lend at an effective rate exceeding 60% per annum. Such an agreement is wholly unenforceable, and the money lender commits a criminal offence. Separately, a loan with an effective rate exceeding 48% per annum is presumed to be extortionate unless proven otherwise. In other words, the court has jurisdiction to allow an interest rate between 48% and 60%.
To qualify as “interest” under the MLO, the funds can be payable to anyone, not just the lender. The courts have also excluded sums deducted or withheld by lenders from the “loan principal” when determining the effective interest rate.
Collusion: s27 MLO
It is illegal for a money lender, whether acting by itself or in collusion with any other person to charge, recover or receive any sum as for or on account of any such costs, charges or expenses (other than stamp duties or similar charges) or to demand or receive any remuneration or reward whatsoever from a borrower for or in connection with its moneylending business.
In HKSAR v Wong Kwok Wai [2013] 16 HKCFAR 191, the Court elaborated that it was concerned with whether the persons alleged to be in collusion were “playing the same game”. Collusion refers to persons “[co-operating] with each other to do or abstain from doing some act(s)”, “to facilitate the conclusion of the loan transaction against the borrower’s interest”. There need not be a conspiracy or prior agreement between the colluding parties. The parties may act together or separately, simultaneously or in disjunctive temporal periods, complementarily or supplementary. In Gain Wealth Global Credit & Investment Limited v Lam Hau Kay [2018] HKDC 796, the Court stated that “[the] game […] refers to the charging, recovering and receiving of any fees, on top of stamp duties or similar charges, by the money lender and other entities for or in connection with the procuring, negotiating, obtaining, guaranteeing and securing the repayment of the loan. The game is therefore the stripping away of the borrower’s assets (whether from the loan or otherwise) by imposing additional fees on top of the interest.”
Whether collusion has occurred is therefore a fact sensitive exercise. In the recent case of Actually Financial Ltd v Wong Pui Mui [2022] HKDC 82, the Court found the licensed money lender colluded with an accounting firm on the following factors, amongst others: firstly, the parties shared a close working relationship and likely shared information to accelerate the defendant’s payment. Secondly, but for colluding with the plaintiff, the accounting firm would not have known to withhold a certain amount of money in protection of the money lender’s interest. The Court found that the accounting firm and the plaintiff had, in the circumstances, been colluding with one another to the borrower’s prejudice: of the loan of HK$1.2 million, it was held that approximately HK$850,000 fell within s27(4) of the MLO as proceeds of the collusion.
Undue Influence
An agreement may be set aside for undue influence i.e., where a party has the capacity to influence and has influenced another party unduly. Vinson Finance re-affirmed the long-standing rule that whenever a wife stands surety for her husband, undue influence is presumed, and the money lender is put on enquiry. In that case, where the wife stood as guarantor for her husband, the court set aside the guarantee on the basis her husband clearly abused her trust, claiming the guarantee was merely some “companies documents”. Moreover, though the transaction was manifestly disadvantage to the wife, no one independently advised her.
In these cases, money lenders will need to take reasonable steps to satisfy themselves that the party susceptible to influence understands the practical implications of the transaction, for example by asking to meet them privately to explain the documents. A confirmation from their solicitor also suffices.
Illusory priority over contrived land registrations
A security over the proceeds of the sale of a property (as opposed to an outright charge over the property) cannot be registered as an interest in land, as illustrated in the case of Winland Finance Ltd v Gain Hero Finance Ltd [2022] HKCFA 3. As a work around for the non-alienation covenants which prevent the borrower/owner from creating mortgages in their favour, successive lenders obtained from the borrower/owner assignment over all future proceeds from the sale of the subject property and undertakings against disposal/creation of encumbrance, which were registered at the Land Registry. When the borrower defaulted, the subsequent lender obtained first a charging order and then an order for sale.
The first issue resolved by the Court of First Instance was that the assignment of future sale proceeds in favour of the prior lender does not create an interest in or otherwise affect land, and therefore the registration has to be vacated. The remaining issue about whether the equitable assignment gave the prior lender any priority over the subsequent lender’s charging order was litigated all the way to the Court of Final Appeal. The court re-affirmed that a charging order has statutory effects over the land itself, and not simply a charge over the proceeds of sale. That means the subsequent lender, by virtue of the charging order against the property, ranked in priority ahead of the prior lender, who only held an equitable assignment over the sale proceeds.
Conclusion
The regulatory aspects of moneylending are becoming more complicated. Since 2016, the Hong Kong government has stepped up measures to regulate money lenders with a four-pronged approach: stricter licensing conditions, enhanced enforcement, public education and publicity, and advisory services to the public. In 2021, the Companies Registry, which is also the Registrar of Money Lenders, released several guidelines to ensure responsible lending. More importantly, the taking of security and its enforcement, which are key to moneylending transactions, are inherently complex and technical.
Moneylenders are advised to keep track of the latest developments and operate their businesses accordingly.
