FEATURE

The Borrower is the Slave of the Lender?

This article highlights the Singapore High Court’s recent decision relating to the Moneylenders Act 2008 (No 31 of 2008)

What does The Good Book teach us about a moneylender? In Proverbs 22:7, it is written, “the borrower is the slave of the lender”. Moneylenders have suffered, whether justifiably or not, from a poor image. “Exorbitant interest rates”, “compounded interest rates”, are just few of the many expressions commonly associated with moneylenders. But is the moneylender ever a slave of the borrower?

The Moneylenders Act 2008 (No 31 of 2008) (the “Act”) was passed in Singapore on 4 December 2008 and came into force on 1 March 2009 along with the Moneylenders (Composition of Offences) Rules 2009. The Act clarified the types of moneylending activities that would be regulated and arguably reduced the potential for the abuse of the unlicensed moneylender defence commonly pleaded by a borrower bent on escaping contractual obligations entered into at arm’s length.

The Act reduces the potential for abuse because it increases the number of lending activities, which do not require a licence by the Registrar of Moneylenders. Section 2 of the Moneylenders Act introduces the new concept of the “excluded moneylender”, which in addition to the previous exclusions of the old regime, introduced additional exclusions, as in cases of a person lending money to his employees as a benefit of employment or solely to corporations. The unlicensed moneylenders defence will, however, continue to be pleaded by borrowers, as it was banally pleaded in the Singapore High Court decision of Agus Anwar v Orion Oil Ltd [2010] SGHC 6 (“Agus Anwar v Orion Oil Ltd”), the first case relating to the Act to be decided by the Courts this year.

The Facts

In Agus Anwar v Orion Oil Ltd, it was left undisputed that it was the Plaintiff who had approached a director of the Defendant Company for a loan of S$10M from the Defendant Company. The Plaintiff had been badly affected by the drastic fall in the stock market during the global economic crisis and the loan was intended to enable him to pay several of his creditors.

Following negotiations over the security to be provided for the loan, which was eventually secured by a mortgage on shares in Keppel Telecommunications and Transportation Ltd and a detached house at Ridout Road, amongst others, the Plaintiff and the Defendant Company entered into a loan agreement and a supplemental agreement respectively on 22 September and 24 September 2008 (collectively “Agreement”). With the legal formalities completed, the loan of S$10M was released from the Defendant Company to the Plaintiff. By the terms and conditions of the Agreement, the loan was to be repaid by 18 December 2008, along with an interest of S$500,000, and subject to additional interest of 20 per cent per annum in the event of late repayment. This meant that if the Plaintiff met the deadline to repay the loan, his exposure would be limited to S$10.5M.

On 18 December 2008, when repayment was due but the Plaintiff made no payment towards the principal or interest, the Defendant Company took steps to recover the loan under the Agreement, culminating in the issuance on 18 April 2009 of a statutory demand against the Plaintiff under the Bankruptcy Act (Cap 20, 2000 Rev Ed). Rule 97(1) of the Bankruptcy Rules provides that debtors who
have been served with a statutory demand under the Bankruptcy Act may apply to Court by way of originating summons for an order setting aside the statutory demand. This the Plaintiff did to avoid his repayment obligations under the Agreement.

On 7 August 2009, the Assistant Registrar granted the Plaintiff’s application and set aside the statutory demand on the ground that there was a triable issue as to whether the Defendant Company was a moneylender under the Act. The Defendant Company successfully appealed before the High Court in Registrar’s Appeal No 299 of 2009.

In his grounds of decision dated 6 January 2010, written after the Plaintiff gave notice of appeal, His Honour Justice Lee Seiu Kin was of the view that the Plaintiff’s application to set aside the statutory demand was, “a totally unmeritorious case in which the plaintiff tried … to escape his obligations, willingly undertaken at the time when he was desperate for cash, but which he did not want to repayfor reasons best known to himself”.

The Issue on Appeal

The issue on appeal was whether the Defendant Company had rebutted the statutory presumption that it was a “moneylender” within the meaning of s 3 of the Act. This rebuttable presumption that a person is a moneylender where interest is payable on a loan had been retained from the previous moneylending legislation (Moneylenders Act Cap 188, 1985 Rev Ed). Section 3 of the Act however refers not to interest but to “a larger sum” being payable on the amount borrowed. Section 3 of the Act states:

Any person, other than an excluded moneylender, who lends a sum of money in consideration of a larger sum being repaid shall be presumed, until the contrary is proved, to be a moneylender.

In effect, any party, whether an individual, business or corporation, who lends money where some interest is payable on the loan in question, would inevitably be deemed to be a “moneylender” within the meaning of s 3 of the Act, unless the lender fell within the definition of an “excluded moneylender” under s 2 of the Act, or the presumption is rebutted.

The potential for this statutory presumption to apply is high, and would encompass loans where the sum to be repaid exceeds the principal, even if the loan was in consideration of a marginally larger sum to be repaid. The occasional loan between friends or colleagues is unlikely to be captured given that interest is hardly part of the lending in those circumstances.

In the present case, as the sum of S$10.5M including interest to be repaid by the Plaintiff to the Defendant Company was a larger sum than the principal amount of S$10M, the statutory presumption was invoked and the burden fell on the Defendant Company to rebut it. Once a prima facie presumption is raised, it is for the lender to rebut the presumption by showing that it does not apply.

The High Court’s Decision

The Court was satisfied that the Defendant Company had rebutted the statutory presumption. In its view, an allegation of a lender to be in the business of illegal moneylending must be crucially supported by evidence of “system and continuity” about such transactions or activities. Lee Seiu Kin J held that there was clearly no evidence before him of any system and continuity in the present case and that the questionable loan “was a one off transaction”.

The Court was guided by a two-step test in deciding whether the presumption of the Defendant Company being a “moneylender” was rebutted. This two-step test was formulated by Lai Siu Chiu J in an earlier case of Ang Eng Thong v Lee Kiam Hong [1998] SGHC 64:

In my opinion, a two-step test can be utilised. The Newton v Pyke test of system and continuity is a crucial, initial consideration. Loans to one individual or to a restricted class do not negate the finding of a moneylending business so long as thereis system and continuity. However, even if there is no such system and continuity, it is still possible in some factual circumstances for the transaction to be a moneylending transaction, as seen in the alternative test in Litchfield. Whether there are such circumstances depends on the particular facts of each case. (Emphasis added).

The Court noted that Lai Siu Chiu J’s formulation was adopted and elaborated by Belinda Ang J in Mak Chik Lun v Loh Kim Her [2003] 4 SLR 338 (“Mak Chik Lun v Loh Kim Her”). Belinda Ang J in Mak Chik Lun v Loh Kim Her had held at [11]:

In rebutting the presumption, the claimant, for instance, has to show that there was neither a system nor continuity in moneylending. The local test of whether there is a business of moneylending is whether there was a system and continuity in the transactions. If no system or continuity is displayed, the alternative test (the Litchfield test) of whether the alleged moneylender is one who is ready and willing to lend to all and sundry provided that they are from his point of view eligible … . (Emphasis added)

In arriving at its decision, the Court clearly regarded as objectionable the Plaintiff’s manipulation of the unlicensed moneylender defence to escape contractual obligations, entered into at arm’s length between sophisticated commercial parties likely to have had theassistance of legal advice. Citing VK Rajah J in City Hardware Pte Ltd v Kenrich Electronics Pte Ltd [2005] 1 SLR 733, at [47]:

The defence of moneylending is often invoked in Singapore by unmeritorious defendants who are desperate to stave off their financial woes. Such defendants should not regard the [Act] as a legal panacea. It should be viewed as a scheme of social legislation designed to regulate rapacious and predatory conduct by unscrupulous unlicensed moneylenders. Its pro-consumer protection ethos was never intended to impede legitimate commercial intercourse or to sterilize the flow of money. It is not meant to curtail the legitimate financial activity of commercial entities that are capable of making considered business decisions. The court has always taken and will continue to take a pragmatic approach in assessing situations when this defence is raised.

It is submitted that the two-step test taken together and read as a whole reasonably supports the propositions as follows:
1. There must be a system and continuity in moneylending, which is a crucial consideration although inconclusive;

2. The fact that there is a lack of a system and continuity in moneylending does not necessarily mean that the presumption
of moneylending is rebutted;

3. If there is no evidence of a system and continuity, the Court will consider whether there is evidence to suggest that the
alleged moneylender lent others money freely and readily;

4. The Court will consider the facts and circumstances of each case. It is important to keep the propositions of law
distinct from their application to the facts;

5. In cases involving business parties who have negotiated the terms of the transaction at arm’s length, the Courts will be
circumspect when allegations of illegal moneylending are raised; and

6. In cases of a one-off transaction, the more likely the argument of the unlicensed moneylender defence will be demolished.

The problem of construction lies with the meaning of the phrase “system and continuity”. This begs the question as to the meaning of the phrase, or the words therein, taken separately.

In Ng Kum Peng v Public Prosecutor [1995] 3 SLR 231, Yong Pung How CJ (as he then was) held that the requirement of “continuity” indicated there must be more than occasional loans, which must be part of an ongoing and routine series of transactions made by the alleged moneylender. The requirement of “system”, on the other hand, requires it to be shown that there must be an organised scheme of moneylending. Indicators of such a scheme would be fixed rates, the rate of interest being dependent on creditworthiness and past conduct of the borrower.

Conclusion

It remains to be seen how the new legislation will reduce the abuse of the unlicensed moneylender defence. That a legitimate lending party such as a company extending a loan to another has to incur unnecessary expenses to recover a loan, which really was extended in good faith, makes it a slave of the borrower.

John Lim*
Harry Elias Partnership
E-mail: john.lim@harryelias.com.sg

* Any errors are the author’s own.