Published date01 December 2009
Date01 December 2009
AuthorSandra Annette BOOYSEN BA (Rhodes University, South Africa), LLB (University of the Witwatersrand, South Africa), LLM, PhD (National University of Singapore); Assistant Professor, Faculty of Law, National University of Singapore.

A Lost Opportunity?

A new Act governing the business of moneylending became effective in Singapore in March 2009. The Act addresses the problem of recalcitrant debtors seeking to avoid their obligations by accusing their creditors of being unlicensed moneylenders, which, if true, has serious implications. At the same time, the Act brings the regulation of moneylenders more into line with other major lenders, such as banks. The new Act adheres to the existing model of credit regulation in Singapore. This raises the question whether a more comprehensive statute, consolidating good practice requirements from all credit providers, would not be more appropriate.

I. Introduction

1 Moneylending is among the oldest of professions1 with a disreputable stigma that has prompted regulation in Singapore and elsewhere. A new Moneylenders Act (“MLA 2008”) was passed in Singapore at the end of 2008;2 it took effect on 1 March 2009.3 According to the announcement by the Ministry of Law, the new legislation is more flexible, more progressive and modernises moneylending

practices.4 Its predecessor was a product of the past: the Moneylenders Act (1985 Rev Ed)5 (“MLA 1985”) was based on the Straits Settlements Moneylenders Ordinance of 19596 which was preceded by the Straits Settlements Moneylenders Ordinance of 1935,7 the latter having been modelled on the UK Act of 1900. A review of Singapore’s law relating to moneylending is timely, coming into effect as it has, in the midst of the biggest financial crisis since the Great Depression, a crisis characterised by a shortage of much needed credit. In 2005, in City Hardware Pte Ltd v Kenrich Electronics Pte Ltd8(“City Hardware v Kenrich Electronics”), V K Rajah J in the High Court urged a review of the moneylending legislation to make it more relevant to the credit needs of a modern Singapore.9 In 1966, a similar message had been sent in the case of United Dominions Trust Ltd v Kirkwood10(“UDT v Kirkwood”) by the Court of Appeal in England about the UK’s Moneylenders Act. The legislation was described as “out of date”11 and “unsuited to modern conditions of trade”.12 Indeed, the UK moneylending legislation was ultimately repealed and replaced by the more comprehensive Consumer Credit Act 1974.

2 The goal of moneylending legislation (in England, Singapore and other jurisdictions such as Australia and New Zealand) has been to deter unscrupulous moneylending activity.13 In the words of Singapore’s Senior Minister of State for Law14 at the second reading of the new Moneylenders Bill, it is “a piece of social legislation” aiming to protect the “small time” borrower.15 Farwell J was blunter in Litchfield v Dreyfus,16 when he said that the legislation aimed to protect “the foolish” from extortion.17 The targets of the statute, old and new, are moneylenders who are “rapacious, extortionate or unmerciful”18 in conducting their business. Their abuses can take various forms, including exorbitant interest rates, withholding (and even manipulating) the terms of the loan from the debtor, and harassing the

debtor and his family for repayment. The ubiquitous problem of exorbitant interest rates is illustrated by the case of Tan Sim Lay v Lim Kiat Seng,19 where an interest rate of 152% per annum was charged.20 The moneylending legislation of the past, however, has generated its own problems; it has given debtors seeking to escape legitimate contractual obligations, but with no substantive basis on which to do so, a technical and very effective defence: asserting that their creditor is an unlicensed moneylender.21 This will be discussed in more detail below; first, an overview of the new Act.

II. Overview of the provisions of the MLA 2008

3 A comparison of the old and the new Acts reveals that the fundamentals are unchanged. Moneylenders must be licensed;22 unlicensed moneylending is a criminal offence liable to punishment by a fine, imprisonment or both;23 and unlicensed loans cannot be enforced in the courts.24 In effect, the unlicensed moneylender is an “outlaw”.25 The rebuttable presumption that a person is a moneylender where interest is payable on a loan has been retained.26 The potential for this presumption to apply to an occasional loan between friends or acquaintances is tempered by the requirement that the lender must be engaged in the business of moneylending before he is required to be licensed.27 This ordinarily requires a “system and continuity about the transactions”.28 Despite the severe penalties, it is apparent that

unlicensed moneylending activities in Singapore continue. In February 2009, it was reported in the Singapore press that unlicensed moneylending had been “the target of an islandwide police operation”.29

4 The preclusion of unlicensed moneylenders from due process in the courts is understandable; unlicensed moneylending is illegal and it would be untenable to allow such moneylenders recourse to the machinery of the legal system to enforce their illegal loan contracts; yet the prohibition has been problematic. Firstly, most unlicensed operators probably prefer their own tried and tested enforcement measures that are undoubtedly cheaper, quicker and perhaps more effective than debt collection through the courts. Consequently, there is not much scope for the enforcement prohibition to deter this species of moneylender, commonly known as a “loanshark”, although, ironically, they are its primary target. Moreover, as already indicated, the unenforceability of unlicensed moneylending contracts has led to abuse by unscrupulous borrowers seeking to escape their contractual obligations. When sued, usually by a respectable entity, the recalcitrant borrower alleges that the contract constitutes a loan from an unlicensed moneylender and is unenforceable. Thus, in Olds Discount Co Ltd v John Playfair Ltd30(“Olds Discount v John Playfair”), the defendants sold their book debts to the plaintiff. When the plaintiff sought to enforce the agreement, the defendants claimed that the transaction amounted to unlicensed moneylending. The defence failed; the court was satisfied that the transaction was a genuine sale of book debts. It also acknowledged that the defendant’s reason for pleading the moneylending statute was to “get out” of paying its debts.31 The court’s disapproval of such conduct was also evident in UDT v Kirkwood,32 where Harman LJ (dissenting on the outcome) described the unlicensed moneylender defence as “wholly without merit”.33

5 A particularly objectionable manipulation of the prohibition on unlicensed moneylending occurred in City Hardware v Kenrich Electronics.34 City Hardware and its managing director had for some years had a business relationship with Kenrich Electronics and its managing director, whereby City Hardware would, at the behest of Kenrich, purchase and pay for goods from suppliers selected by Kenrich. City Hardware would then sell the goods on credit to Kenrich, for a “relatively modest”35 mark-up. The court was satisfied that the

arrangement, while serving the purpose of giving Kenrich credit that it was unable to obtain from the supplier, was a genuine purchase and on-sale of goods and not a loan.36 It was therefore not a sham transaction. The next development in the saga marks the highpoint of the defendant’s repugnant conduct. It began purchasing goods, in terms of the arrangement described above, from a supplier called Aloh which, it transpired, was a “front” for Kenrich’s managing director.37 The court was satisfied that City Hardware, through its managing director, was not aware of Aloh’s connection with Kenrich.38 Kenrich defaulted on the invoices rendered to it by City Hardware and when sued, Kenrich alleged that the cash payments by City Hardware of the “purchase” price of the goods to the masquerading supplier, Aloh, were in fact unenforceable loans under the moneylending legislation. The defence failed, the court’s disapproval, apparent.39 V K Rajah J expressed his concern about the scope for the moneylending legislation to target legitimate business arrangements.40

6 The sentiments of V K Rajah J in City Hardware v Kenrich were reiterated by the Court of Appeal in Donald McArthy Trading Pte Ltd v Pankaj s/o Dhirajlal,41 where the alleged moneylender charged for the use of his credit facilities by the putative borrower to obtain letters of credit for the purchase of goods. The court construed the arrangement as a loan or rental of credit facilities and not as a moneylending transaction caught by the MLA 1985.42 Chan Sek Keong CJ expressed the view that it was unnecessary for the MLA to proscribe financial arrangements between business parties when they “negotiate the terms of the transaction at arm’s length”.43 Such arrangements were “a convenient way to expand credit facilities in the market”, he said.44

7 The MLA 2008 will reduce the potential for the abuse of the unlicensed moneylender defence. It does so by increasing the number of lending activities which do not require to be licensed. The Interpretation section reflects the new approach.45 It introduces the concept of an “excluded moneylender”. Excluded moneylenders incorporate the

previous exclusions from the MLA 1985,46 including those who lend as a subsidiary activity to support their primary business and those authorised by statute, co-operative societies, pawnbrokers and certain members of the financial services sector which are now collectively and neatly described as those regulated by the Monetary Authority of Singapore.47 The most significant change in the new MLA 2008 is the extension of the excluded class to a number of new categories, namely, those who lend only to: their employees,48 wealthy/sophisticated investors,49 companies, limited liability partnerships and trustees of business trusts and real estate investment trusts (“REITs”).

8 The thinking behind the exclusion of this large category of entities presumably lies in the sentiments...

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