Can the Moneylenders Act, a piece of social legislation originally intended to curtail loansharking activities, apply to international syndicated loans made to a Singapore company? Practitioners appear to be divided.

The Moneylenders Act and International Syndicated Loans 

Introduction

Singapore banking lawyers are experiencing an increase in mandates to advise on loan financings where a Singapore company proposes to borrow funds from an international lending syndicate where some, or all, of the lenders may be based outside of Singapore. Such financings are typically driven by a range of pricing, tax and other structuring considerations. As part of the legal risk analysis, we are often called on to advise on any local laws which could render the loan agreement unenforceable. A key issue amongst practitioners is whether the Moneylenders Act (Cap 188, Revised Edition 2010) (the “MLA”) applies to a loan made by a financial institution outside (in the broad sense) Singapore to a company incorporated in Singapore. The outcome of the analysis can have significant commercial and structuring repercussions on potential lenders, including, for example, on how they should participate in the loan and how they may make their exit. 

Under the MLA, a person is prohibited from carrying on the business of moneylending in Singapore unless he is: (i) authorised to do so by a licence; (ii) an “excluded moneylender”; or (iii) an “exempt moneylender”. A person would be an “unlicensed moneylender” under the MLA if he does not fall within any of these three categories. Pursuant to s 14(2) of the MLA, where any contract for a loan has been granted by an unlicensed moneylender, or any guarantee or security has been given for such a loan, the contract for the loan, and the guarantee or security, as the case may be, shall be unenforceable and any money paid by or on behalf of the unlicensed moneylender under the contract for the loan shall not be recoverable in any Court of law.

Practitioners advising a syndicate of international lenders may be required, for various reasons, to focus their analysis on whether their clients fall within the definition of “excluded moneylender”.¹ This is not a straightforward analysis – based on the literal wording of s 2 of the MLA, arguably an offshore lender making a loan to a Singapore company (hence prima facie falling within paragraph (e)(iii)(A) of the definition of “excluded moneylender”) would not be an “excluded moneylender” if it had in the past lent money to an individual in Singapore who is not an “accredited investor”. In context, this could mean that a loan made by the London branch of a British bank to a Singapore company could be unenforceable if it had, in the past, made loans to individuals in Singapore.²

This article considers the legislative intent behind the MLA and a series of recent Singapore cases analysing the MLA, and argues that the likelihood of a Singapore company successfully raising a defence under s 14(2) of the MLA is small.   

The Moneylenders Act – Purpose and Legislative Intent

The MLA was enacted in Singapore in 1936 as the Moneylenders Ordinance (Cap 193, 1936 Ed) and was modelled upon the English Moneylenders Acts of 1900 (63 & 64 Vict, c 51) (UK) and 1927 (17 & 18 Geo. 5, c 21) (UK).  In Litchfield v Dreyfus [1906] 1 KB 584, Farwell J observed that the object of the English legislation was intended “to save the foolish from the extortion of a certain class of the community who are called money-lenders as an offensive term”.

These comments echo the views which the English Select Committee took into account when enacting the English Money-lenders Act 1900. The Crowther Committee’s Report on Consumer Credit (Cmnd 4596, 1971) at para 2.1.22 summarised these views as follows:

… Much of the evidence given to the Committee, and to its successor appointed in 1898, was concerned with such victims of the rapacious moneylender as the widow forced to borrow on a bill of sale of her household effects, and the young son of the aristocracy who in the course of sowing his wild oats ran up large debts, at exorbitant interest, which his family [was] later blackmailed into paying to avoid the publicity of court proceedings.

A review of the Singapore parliamentary records on Bills relating to the predecessors to the current MLA demonstrates a congruent legislative intent. For example, in Singapore Parliamentary Debates, Official Report (2 September 1959)  vol 11 at col 593, Seow Peck Leng made the following remarks:

This Bill [referring to the Moneylenders Bill] is laudable for the fact that it protects the poor from the clutches of unscrupulous moneylenders. This Bill, in my opinion, should be implemented as soon as possible to ease the hardship of those already victimised and to prevent those who, because of financial difficulties, may be victimised in the future …

It is the very, very poor, Sir, who need protection most, who usually take loans of less than $100, and I think that they are the ones who should be protected …

In City Hardware Pte Ltd v Kenrich Electronics Pte Ltd  [2005] 1 SLR 733 (“City Hardware”) the High Court noted that the MLA has “the salutary objective of proscribing rapacious conduct by unlicensed and unprincipled moneylenders” who prey on individuals who turn to them out of financial destitution. It emphasised that the provisions of the MLA are not intended to apply to transactions made at arm’s length between commercial entities and it has never been the objective of the MLA to prohibit or impede legitimate commercial intercourse between commercial persons. 

The High Court further emphasised in City Hardware that the Courts should not adopt an over-extensive application of the MLA even though its provisions may be literally construed to cover most commercial situations, as that would not advance the legislative purpose of the Act. 

The current MLA is based substantially on its 2008 predecessor. At the Second Reading Speech for the 2008 amendments (Singapore Parliamentary Debates, Official Report (18 November 2008) vol 85 at cols 1001-1004), the policy objectives of the MLA were again acknowledged by Associate Professor Ho Peng Kee, the then Senior Minister of State for Law:

Sir, the Moneylenders Act was enacted in 1959, about 50 years ago. Amendments have been few and far between, primarily focusing on enhancing the provisions that tackle unlicensed moneylender or loansharking. The Act was intended as a piece of social legislation to safeguard what we would call “small-time borrowers” from unscrupulous moneylenders. Hence, its chief concern was the charging of exorbitant interests. The lenders then were also essentially small-scale operators.

In discussing the 2008 amendments to the MLA, the Court of Appeal recently made the following observations on “excluded moneylenders” in Sheagar s/o T M Veloo v Belfield International (HongKong) Ltd [2014] SGCA 24 (“Sheagar”):

In our judgment, in passing the 2008 amendments, Parliament had intended to de-regulate commercial borrowing by excluding this class from the MLA in addition to those already excluded prior to 2008. This was to ensure that the flow of credit in the business domain was not stifled. Furthermore, insofar as paragraph (e) of the definition of “excluded moneylender” in s 2 of the MLA is concerned, Parliament also regarded such borrowers, that is to say, corporations, limited liability partnerships, business trusts, real estate trusts and sophisticated investors as being a less vulnerable class of borrowers that did not need the protection afforded by a piece of social legislation. This in turn justified a lower degree of regulatory oversight over the activities of lenders who lent exclusively to such borrowers.

This background suggests that the MLA simply does not apply to lenders who fall within the definition of “excluded moneylender” under s 2 of the MLA and their activities therefore do not come within the regulatory ambit of the MLA at all. (emphasis mine)

The Bill for the current version of the MLA was thoroughly debated in Parliament in January 2010 at the Second Reading Speech for the Moneylenders (Amendment) Bill (Singapore Parliamentary Debates, Official Report (12 January 2010) vol 86. The entire debate between several Members of Parliament appears to have focused on the implementation of enhanced measures to tackle the “loanshark scourge”, including stiffer penalties under s 14 of the MLA for unlicensed moneylending. Based on an electronic search conducted on the said parliamentary report, the word “syndicate” appeared in the search results in a total of 52 instances, being in each case contextual references to “crime syndicate” or “loanshark syndicate”; there was not one reference to “syndicated loan”.

Threshold Question – Whether the Moneylenders Act Applies

In Donald McArthy Trading Pte Ltd and Others v Pankaj s/o Dhirajlal (trading as TopBottom Impex) [2007] 2 SLR 321 (“Donald McArthy”), the Court of Appeal agreed with the High Court in City Hardware that “The provisions of the MLA are not intended to apply to transactions made at arm’s length between commercial entities. It has never been the objective of the MLA to prohibit or impede legitimate commercial intercourse between commercial persons” and emphasised that a Court should give effect to the legislative purpose when interpreting the MLA.

Although in Donald McArthy the defence based on the MLA failed on other grounds (notably the Court of Appeal found that there was no loan of money under the agreements in question), it appears that the Court of Appeal was suggesting that the threshold question of whether the MLA was applicable to the facts should be asked before embarking on an analysis based on the wording of the MLA.

This approach was applied, in a rather robust manner, by the High Court in EC Investment Holding Pte Ltd v Ridout Residence Pte Ltd and another (Orion Oil Ltd and another, interveners) [2011] 2 SLR 232 (“EC Investment”). In finding that the transaction in question was not the kind that the MLA was meant to prohibit, the High Court appears to have rejected the defence based on the MLA by using a purposive interpretation and did not explore the concept of “excluded moneylender” in detail.

In EC Investment, the defendant Ridout Residence Pte. Ltd. (“Ridout”), a Singapore company, submitted that the transaction entered into between the plaintiff  EC Investment Holding Pte Ltd, also a Singapore company, and itself, was caught by the prohibition on unlicensed moneylending in the MLA. At all material times, Ridout was owned and controlled by one Agus Anwar (“AA”), an individual accepted by the High Court as an “experienced businessman”.

In arriving at his decision, Justice Quentin Loh made the following findings:

… I have come to the conclusion…that this transaction was not the kind of transaction that the Moneylenders Act was meant to prohibit.

(a) First I draw guidance from the comments of Rajah J in City Hardware which was approved by the Court of Appeal in Donald McArthy. AA is no babe in the woods, he is an experienced business entrepreneur and moreover had the benefit of advice from his lawyer and his CFO before he signed the 1st Option and the Deed of Settlement. In my judgment, these two factors kept this transaction from falling within the Moneylenders Act. It was in a commercial context of a loan with security between corporations, even though it was AA who was the directing will and mind of the 1st Defendant; it was not the kind of transactions the Moneylenders Act was meant to catch, nor was AA the kind of person the Moneylenders Act was meant to protect. He knew the commercial risk he was taking, but he miscalculated on his ability to repay the loan … 

Based on the approach taken in EC Investment, it would appear that the key question that must first be asked where the MLA is raised as a defence is whether the transaction in question is the type of transaction that the MLA was mean to prohibit. What is clear from EC Investment is that the MLA does not apply in the commercial context of a loan with security between corporations, particularly where the debtor in question is commercially savvy and has had the benefit of legal advice. To the Court’s mind, these are not the type of debtors which the MLA was designed to protect.

The Sheagar Test

The Court of Appeal recently established in Sheagar a 4-step test to determine whether a person has breached s 14(2) of the MLA.

In Sheagar, Belfield International (Hongkong) Ltd (the “Respondent”), a corporation, claimed against Sheagar s/o T M Veloo (the “Appellant”) the sum of US$358,000 with contractual interest plus costs on an indemnity basis. The claim was made pursuant to a guarantee given by the Appellant in respect of a loan extended to Blue Sea Engineering Pte Ltd by the Respondent.

The Appellant raised defences based on, among others, illegality under the MLA. Specifically, the Appellant argued that the relevant loan and guarantee were unenforceable pursuant to s 14(2) of the MLA on the basis that the Respondent was an “unlicensed moneylender”.

On the facts, Chief Justice Sundaresh Menon, delivering the findings of the Court of Appeal on the issue of burden of proof, held (after a relatively lengthy and involved analysis spanning approximately 40 paragraphs) that the burden of proving that the lender is not an excluded moneylender falls on the borrower and found that the borrower/obligor (ie the Appellant) had not discharged its burden of proof. Accordingly, the appeal was dismissed.

In arriving at its decision, the Court of Appeal established the following principles in relation to s 14(2) of the MLA:

1. To rely on s 14(2) of the MLA, the borrower must prove that the lender was an “unlicensed moneylender”; 

2. If the borrower can establish that the lender has lent money in consideration for a higher sum being repaid, he may rely on the presumption contained in s 3 of the MLA to discharge this burden;

3. The burden then shifts to the lender to prove that he either does not carry on the business of moneylending or possesses a moneylending licence or is an “exempted moneylender”; and

4. If there is an issue as to whether the lender is an excluded moneylender, the legal burden of proving that he is not will fall on the borrower.

The Court of Appeal noted that in introducing the concept of an “excluded moneylender” in 2008, the Singapore Parliament had intended to de-regulate commercial borrowing. The Court of Appeal found, as a matter of fact, that the loans in question bore the very features of commercial borrowing because such loans entered into between commercial entities for commercial purposes. In the circumstances, the Court of Appeal found that the loans fell within both the letter and spirit of paragraph (e)(iii)(A) of the definition of “excluded moneylender” and that the Appellant had not discharged his burden of proof. In the ultimate analysis, it followed that the disabling provision in s 14(2) of the MLA did not apply.

While the Sheagar test clarifies the law to a certain extent, it also, however, arguably introduces an element of ambiguity – the Court of Appeal appears to be saying that if the loan is between “commercial entities for commercial purposes”, the burden of proof would fall on the borrower to show that the lender is not an excluded moneylender (ostensibly by adducing evidence to prove that the lender has at some point made loans to individuals who are not accredited investors). Taken to its extreme conclusion, this could mean that a perfectly legitimate commercial transaction could be rendered unenforceable because a lender had at some point in time also lent money in unrelated transactions to individuals in Singapore who are not accredited investors. 

Indeed, such a result would appear to be inconsistent with the mischief which the MLA is intended to address and it is doubtful that the Singapore Courts would permit such an argument to succeed in the specific context of an international syndicated loan to a Singapore company. In City Hardware, Justice Rajah (as he then was) provided the following warning to borrowers who may intend to use s 14(2) of the MLA as a defence:

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 MLA 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 sterilise 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. The MLA is not invariably contravened in transactions where the object of the transaction is to raise money. In the final analysis, the economic objective of an arrangement to provide credit should not be confused with its legal nature. (emphasis added)

In the ultimate analysis, it is important to note that while the Court of Appeal in Sheagar had specifically referred to EC Investment in its deliberations, it did not disapprove of or overrule the “threshold test” applied by the High Court in EC Investment. This stands in contrast to the approach taken by the same Sheagar Court on other issues, notably where it expressly disapproved of the reasoning in a line of local cases discussing the burden of proving that a lender is an “excluded lender”. In an appropriate case, it thus remains open to a Singapore Court to continue to take a pragmatic approach by applying the EC Investment “threshold test” to achieve an outcome consistent with the legislative purpose of the MLA and avoid an anomalous result.

“Singapore Anti-Loanshark Law Strikes Down International Syndicated Loan” – a Possible Headline for the Financial Times? 

The MLA is intended as a piece of social legislation to safeguard “small-time borrowers” from unscrupulous moneylenders. The Singapore Courts have held that the MLA is not meant to curtail the legitimate financial activity of commercial entities that are capable of making considered business decisions and, to this end, have taken a pragmatic approach in assessing situations when a defence under s 14(2) of the MLA is raised. In the context of an international syndicated loan where the amounts borrowed are typically in the hundreds of millions of dollars or more and where the corporate borrower typically has had the benefit of legal advice, it would appear unlikely that the Singapore Courts would allow a defence under s 14(2) of the MLA, without more, to succeed. To do otherwise would be contrary to the stated purpose of the MLA and lead to considerable damage to Singapore’s reputation as an international financial centre.

► Eugene Phua*  
    Clifford Chance Pte Ltd
    E-mail: [email protected]

* The views expressed in this article are the personal views of the author and do not represent the views of Clifford Chance Pte Ltd.

Notes

1 Under s 2 of the MLA, “excluded moneylender” includes:

“(e) any person who —

(i) lends money solely to his employees as a benefit of employment;
(ii)lends money solely to accredited investors within the meaning of section 4A of the Securities and Futures Act (Cap 289);
(iii) lends money solely to —

(A) corporations;
(B) limited liability partnerships;
(C) trustees or trustee-managers, as the case may be, of business trusts for the purposes of the business trusts;
(D) trustees of real estate investment trusts for the purposes of the real estate investment trusts…”

2 This assumes that the London branch does not hold a license under the MLA or the Banking Act (Cap 19), as is often the case in practice.  Generally, the banking license granted under the Banking Act is branch or territory specific, so the London branch of a bank would not ordinarily be deemed to be licensed to conduct banking business in Singapore solely by reason that its Singapore branch is so licensed.