Money Lending Business

Banking business - Receiving general public money

- Paying or collecting cheques
- Does not include lending
Shadow banking - No concession to borrower
industry - Time bomb
Money Lender - NOT applicable to authorized institution
Ordinance - Apply to (1) money lender in HK AND (2) loans took out in HK – i.e. oes not have to be a money
lender for Ordinance to apply
Loan transaction? - in substance or effect a loan of money + an agreement to secure the repayment of any such loan
- NOT required to charge interest
- NO hire purchaser transaction
- NO conditional sale transaction
- EXEMPTED LOAN?
o Loan made to a co with paid up capital of 1M
o Credit card
o Licensed pawnbroker
Money Lender - Register with the Companies Registrar AND the Commissioner of Police
License - Loan irrecoverable if not licensed to lend money, SUBJECT to the court’s discretionary power to
allow recovery of loan
- Money lender = business is making loans or advertises or announces himself or holds himself out in
any way as carrying on that business – more than occasional or disconnected loan
- EXEMPTED PERSON?
o Authorized institutions
Formality - Must comply with S.18 MLO  otherwise not enforceable
- Subject to the court discretion
Effective interest rate - Interest = any amount in excess of the principal
- Compound interest is illegal SUBJECT to court discretion – but bank can charge compound interest
- Must be specified in the LA
- > 48% extortionate
- >60% illegal
- SUBJECT to court discretion to reopen extortionate transactions
- DOES NOT APPLIED to [1] authorized institution and [2] co with paid up share capital of 1M
Consequence of - Criminal liability
breach - Civil liability
Power to enforce - S.18 (Form of agreement)
illegal/ transaction - S.22 (Illegal agreement)
breaching MLO - S.25 (reopening of certain transaction)
Code of ML Practice - Non statutory code
Pawnbroking
Requirement - = EXEMPTED LOAN
- Must be licensed
- Limit to 100K
- Charge simple interest
- DD checks and prohibition
- Issue tickets
- Unredeemed goods within 4 lunar months to become property of pawnbroker UNLESS loan renewed
Unlawful pawning - Court consider the fault or carelessness of owner or pawnbroker
o Pawnbroker should [1] check the goods against a list provided by the police as to goods
which have been stolen and [2] to make report to the police if the goods have been reported
as stolen
o Statutory duty on owner
- Civil remedy bared
Law of pledge - Delivery of possession
- Transferable
- Right to possess
- Right to redeem
- Pledgor retains ownership
- Power of sales + Account for surplus + Fiduciary relation
Limitation - Inconvenient to hold the pledged assets
- Cannot use the pledged assets in business to generate income
Loans and Credits
Debt vs Equity - Debts: debt service obligation irrespective of profits; interest are tax deductible; loan due at a specified
time; bank can take action to recover the loan; no loss of control
Loan - Loan = [1] loan of money; [2] deferment of obligation to pay for goods and services
- Demand loan – loan can be demanded and repayable at any time at the lender’s discretion
- Revolving loan
o Repayable on demand – no certainty – uncommitted
o Flexibility to borrow and pay again
o Higher costs
- Term loan
o Certainty – committed – fixed repayment period
o Less flexible
o Relatively lower costs
Hybrid clause - Question of the parties intention
“Repayable on o Long list of EOD in LA with clause allowing lender to demand early payment  term loan
demand” o [1] Loan repayable on demand AND [2] bank intended to make the facility available until a
specified date  not inconsistent  demand loan
Demand must be - Must specify the right to demand and the form of demand
communicated - Demand for immediate repayment possible
Loan Agreement
Early break - No repayment during an interest period
protection/ penalty - Break costs clause
- Default interest
o Penalty or genuine pre-estimate of loss: whether the term is commercially justifiable? What is
the actual loss?
Commitment to lend - Term sheet is only an agreement to agree
- Does not create a legal binding contact EXCEPT [1] banks cost and fees and [2] the confidentiality
undertaking
Definition and - To make doc shorter
interpretation - Ensure consistency
Conditions - Conditions that lender requires a borrower to fulfil before it can issue that first utilization request
precedents - Bank is not obliged to lend if conditions precedents are not satisfied
Purpose clause - Terms must not be illegal or contrary to public policy
- Illegality does not prevent a claimant from making a claim but if doing so, she does not have to plead
the illegality
- SUBJECT to public policy approach: as a matter of interest enforcement of the claim would be
harmful to the integrity of the legal system?
- If the purpose of the loan is specified, and if the purpose has failed, any money which has ot been
drawn down but remains unspent will be held by the borrower on resulting trusts for the bank
- Check the actual and ostensible authority of the agent
Drawdown and - Utilization request
payment
Repayment and - On breach: acceleration = cancel commitment
prepayment - Interest: Market Disruption
- Adjustment to give lender a level of protection
Representations and - Statement of fact – will be condition precedent to draw down of the facility
warranties - [1] Legal and [2] Commercial representations
- Repeated representations
- Can be EOD if turned out untrue  Misrep/Negligent misstatement/ Recession allowed
Covenants - = promises made by the borrower to the lender
EOD - EOD = failure to fulfill an obligation or condition essential to the contract
- [1] payment default [2] non-compliance [3] anticipatory
- Grace period: bank reluctant
- Cross default: automatically default borrower under the loan in the event that brrower defauls under
certain types of agreement
- Bank can:
o Enforce security; cancel any undrawn amount; declare any or all outstanding amounts
immediately due and payable
o Must give notice before enforce right
Code of banking - Ensure information that must be communicated to the customer
practice - Can complain to HKMA if a bank does not follow the code
Laws on secured credit
Security - Personal security: cannot follow the claim to other people/ assets  subject to pari passu principle
- Real security: follow the assets and does not affected by insolvency
Guarantee - Personal right
- Form of undertaking by one party to answer for another party’s liability
- = secondary obligation
- Guarantor can set off and counter claim against the borrower
- The amendment, variation, waiver or release of an obligation by borrower must be within the general
purview of the original guarantee [Triodos Bank]  get approval from guarantors
- Guarantors have subrogation right [s.15 LARCO]
Comfort letter - A statement of intent that could vary
- Does not intend to form a binding obligation
- Not enforceable if it is only a representation of fact
Set off - Statutory set off [s.35 BO] – mutal credits, mutual debts or other mutual dealings between a bankrupt
and any other person proving a debt
- Contractual set off – common to see in bank doc
- Equitable set off
Secured credit - Perfection by possession; notice; registration
- Dearly Hall principle: assignment of chose in action – 1/ no notice of an earlier assignment; 2/ give
notice of the assignment to the debt first – constructive notice
- Registration: - ensure validity but may not necessarily grant priority
o Security void against the company
o Debt secured by the charge becomes immediately repayable
Fixed charge - Gives lender control [Re Spectrum]
Floating charge - Co is allowed to deal with assets in its ordinary course of business until the floating charge crystalizes
Crystallization of - Automatic crystallization clause
floating charge - Winding up order
- Appointment of a receiver or administrative receiver
- Cessation of business
Negative pledge - Prohibit the charger to create a subsequent charge ranking in priority or pari passu to the existing
charge
- EXCEPT bona fide disposal for value for trade creditors in the ordinary and usual course of business;
security which has been disclosed; setting off; liens arising by operation of law in the ordinary course
of trading
- NOTICE: subsequent charge will take free from negative pledge UNLESS it has notice of the clause –
now Constructive notice OK
Charge created at - Connected person: 12 months + unable to pay its debts at the time OR becomes unable to pay its debts
relevant time without in consequence of the transaction under which the charge is created
new consideration - Non connected person: 2 years
- Paid money to the company? Supply property or services to the company?
Avoidance of - Disposition made after the commencement of the WU  Void
disposition of
property after WU
Undervalue - 5 years before WU
transaction - Make a gift OR enter into a transaction for a consideration the value in money or money’s worth
significantly less than the value
- EXCEPT good fail exemption
Unfair preference - Unfair preference
- Desire to prefer – statutory presumption for connected person
o EXCEPT: genuine pressure exerted on the debtor
- Connected person: 2 years before WU
- Non connected person: 6 months before WU
- Consequence: void
Disposition to - Prove intend to defraud
defraud creditors - For consideration? In good faith?
Pledge - Possession
- Cannot pledge intangible assets
Bank lien - Arises by operation of law
- Retain the possession until sums are disposed
Mortgage - Equity of redemption
- Equitable mortgage can be ignored by a bona fide purchaser for value who has no notice of the M