Ethoz Capital Ltd v Im8ex Pte Ltd and others

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 20 January 2023
• Neutral Citation: [2023] SGCA 3
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 28 of 2022
• Published date: 27 January 2023
• Year: 2023
• Hearing Date: 08 November 2022
• Plaintiff Counsel: Wong Soon Peng Adrian, Ang Leong Hao and Bryce Yeo (Rajah & Tann Singapore LLP)
• Defendant Counsel: Ranvir Kumar Singh (UniLegal LLC),The third respondent absent and unrepresented.
• Citation: [2023] SGCA 3

Steven Chong JCA (delivering the judgment of the court): Introduction

In our jurisprudence, the penalty doctrine makes a distinction between primary and secondary obligations, with only the latter attracting its application. In Leiman, Ricardo and another v Noble Resources Ltd and another [2020] 2 SLR 386 (“Leiman”), we referred to this as the “threshold issue” in the penalty doctrine: at [99].

In attempts to get around this threshold, parties have resorted to what we have previously referred to as “clever drafting”: Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals [2021] 1 SLR 631 (“Denka”) at [95]. We should observe that “clever drafting” is a reference to a form of drafting which is intended to obscure the true nature of a provision by obfuscating its substance as a secondary obligation. Such practice should not be encouraged, and if such drafting is brought to the attention of the court, it will be subject to rigorous analysis and we will not hesitate to strike it down if it is found in substance to be a secondary obligation that is in fact a penalty.

On the other hand, there is nothing intrinsically objectionable for parties to draft appropriate clauses to reflect their agreement that an obligation is a primary obligation even if it is a particularly onerous one. For example, in the context of loan agreements like those in the present appeal, even if the interest rate agreed upon is objectively unattractive, if its payment is clearly intended to be the borrower’s primary obligation, the court will generally uphold it. It thus will not fall within the scope of the penalty doctrine. For example, in Alternative Advisors Investments Pte Ltd and another v Asidokona Mining Resources Pte Ltd and another [2022] SGHC 41 (“Asidokona”), Hoo Sheau Peng J was faced with an assertion that the contractual interest rate of 5% per month was “clearly extortionate” and a penalty: at [130]. She held that the penalty doctrine was not even engaged because the contractual interest rate was the primary obligation under the loan there: at [129] and [133]. While such a lender (assuming that it is an excluded moneylender) may not be very competitive or attractive to some borrowers, the penalty doctrine does not generally come in aid of borrowers who agree to pay such interest rates.

In the case before us, the appellant argues that the payment of a sum constituting substantial interest on several loans is a primary obligation, and thus not subject to the penalty doctrine. However, the provision that it relies on was grafted into the contract without paying sufficient attention as to how it would interact with the other terms, leading to a document with seemingly contradictory clauses such that the nature of the obligation in question was unclear. This judgment will examine how such a conflict is to be resolved in the face of contradictory clauses in the contract.

Facts

The background to the present appeal is set out in Ethoz Capital Ltd v Im8ex Pte Ltd and others [2022] SGHC 12 by Andre Maniam J (“the Judge”). It suffices to reproduce a brief summary of the salient facts.

The Prior Facilities

The appellant, Ethoz Capital Ltd (“Ethoz”), is an excluded moneylender under the Moneylenders Act (Cap 188, 2010 Rev Ed) (“Moneylenders Act”).

The first respondent, Im8ex Pte Ltd (“Im8ex”), is a privately held company. The second respondent, Mr Chua Soo Liang (“Mr Chua”), is the sole director and shareholder of Im8ex. He is also the nephew of the third respondent, Mr Tan Meng Kim (“Mr Tan”). It should be noted that Mr Tan was absent throughout the proceedings and remains unrepresented. For the purposes of this judgment, as all three respondents’ interests are aligned, we will refer to them collectively as Im8ex.

Ethoz lent sums of $1m, $3.15m and $2.15m to Im8ex under three loan facilities for a total principal sum of $6.3m (“the Prior Facilities”). The Prior Facilities were for a term of 12 months, and their interest rate was between 6.25% to 6.5% per annum.

The Prior Facilities were secured by mortgages over four different properties which we will refer to as “the Alexandra Property”, “the Hoe Chiang Property”, “the Bayshore Property” which was Mr Chua’s home, and “the Taman Permata Property” which was Mr Tan’s home (collectively, “the Properties”). The Prior Facilities were also guaranteed by Mr Chua and Mr Tan.

The Facilities

In July 2019, Ethoz and Im8ex began discussing the renewal of the Prior Facilities. This led to the signing of loan facilities that are the subject of the present appeal (“the Facilities”). They were signed in November 2019 and January 2020. Like the Prior Facilities, these were secured by guarantees from Mr Chua and Mr Tan, and mortgages over the Properties. The total principal amount borrowed by Im8ex under all the Facilities was similarly $6.3m, but this amount had been split into four loans of, respectively: (a) $1.425m; (b) $1.725m; (c) $1m; and (d) $2.15m. As the terms of the Facilities are identical, we will refer to the amounts borrowed under them as “the Advance”.

As per Clauses 5(A) and 7(A), the Facilities were extended at an interest rate of 3.75% per annum, with instalment payments to be made every month over 15 years, ie, over 180 months. Schedule 3 of the Facilities set out the 180 instalment payments that Im8ex was obliged to make. These were equal instalment payments, made up of repayments of the Advance and interest payments.

Importantly, Schedule 3 also included an amount termed “Total Interest” which was the aggregate of all the interest payments and is the amount arrived at when the flat rate of 3.75% per annum is applied to the Advance.

Significantly, Clause 7(B) provided that the Total Interest “shall be deemed earned and accrued in full upon the drawdown of the Advance”. Such a clause was, however, not present in the Prior Facilities.

There are also several provisions relevant in the event that Im8ex defaults on payment: Clause 15 provides that if Im8ex defaults on payment, it will pay interest (“Default Interest”) on such sums from its due date to the date that it is paid. Such interest is set at a rate of 0.0650% per day (“the Default Interest rate”) and will be “calculated daily with monthly rests”. Further, any unpaid Default Interest “shall be added to the relevant outstanding amount on a monthly basis and shall itself bear interest” at the Default Interest rate. Clause 5(A) provides that in default of payment of any of the instalments in Schedule 3, Ethoz “may treat the whole of [the Facilities] or the balance thereof … together with interest thereon and all other sums due and owing under this Agreement as immediately due and payable without any demand.” Clause 14 provides that an event of default will occur if Im8ex does not pay any of the “sum[s] payable under [the Facilities] when due” (as per Clause 14(A)(1)), and that this will entitle Ethoz to declare that “all amounts due and owing under [the Facilities], including the Advance and the Total Interest and any default interests … be immediately due and payable.”

Finally, under the Facilities, Im8ex can make prepayment of the Advance after six months from the date of drawdown. Clause 6(B) provides that such prepayment would include “the Advance and interest computed thereon in full”, subject to conditions laid out in Clauses 6(B)(1)–(5).

Ethoz seeks to enforce the Facilities

Im8ex defaulted on payment within the first year of all the Facilities. Consequently, on 3 September 2020, Ethoz gave notice demanding immediate and full payment of the Advance and Total Interest, citing Clauses 5(A), 7(B) and 14(B) of the Facilities. They also sought delivery of vacant possession of the Properties.

On 15 January 2021, Ethoz filed HC/OS 30/2021 (“OS 30”) which sought the following orders: first, that Mr Chua and Mr Tan deliver vacant possession of the Properties; and second, that Im8ex, Mr Chua and Mr Tan jointly and severally pay Ethoz the Advance, Total Interest, and Default Interest due under the Facilities.

Im8ex resisted OS 30, making broad assertions of “unconscionable interest” and “unfair terms”. It also asserted that Ethoz had misrepresented the terms of the Facilities, and further, that Ethoz did not fully advise it on how the Total Interest worked.

OS 30 was heard by an assistant registrar (“the AR”) on 5 April 2021. Three days later, the AR gave his decision, finding for Ethoz.

Proceedings below

Im8ex appealed against all the orders made in HC/RA 112/2021 (“RA 112”). The Judge heard the parties on 29 June 2021 and rendered his oral decision on 22 October 2021. On 2 January 2022, the Judge released his full grounds of decision which canvassed four issues: “Total Interest”, “Default Interest”, “Misrepresentation” and whether Im8ex could redeem the Facilities and the Properties (“Redemption”). Total Interest – Im8ex argued that the Total Interest was a secondary obligation which arose as a remedy for the breach of Im8ex’s primary obligation to repay the Advance and interest in monthly instalments. Ethoz maintained that the claim for the Total Interest did not fall within the scope of the penalty rule. In support of its position, Ethoz raised two other High Court decisions where the Total Interest was not found to be a penalty: Ethoz Capital Ltd v T-Pacific Pte Ltd and others HC/RA 350/2019, HC/OS 938/2019 (1 April 2019) (“T-Pacific”) and Ethoz Capital Ltd v Thistle Energy Pte Ltd and another HC/RA 118/2021, HC/OS 1127/2020 (10 August 2021). The Judge declined to follow these decisions and instead examined Clause 7(B) in the context of Clauses 5, 6 and 14. He concluded that the payment of the Total Interest upon default was a secondary obligation and ultimately a penalty. Default Interest – Im8ex argued that the Default Interest rate in Clause 15 was also a penalty, citing the difference from the...