Re Lau Ming Tak and Another t/a Wing Hing Lung

HCB000458/1985

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

NO. B458 OF 1985

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Coram: Deputy High Court Judge Scriven

Date of Hearing: 27 January 1986

Date of Judgment: 27 January 1986

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JUDGMENT

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1. At the conclusion of this adjourned hearing of a Bankruptcy Petition dated 5th July 1985 I made (on the 27th January 1986) Receiving Orders against LAU Ming-tak and LAU Ming-yuen.

2. The Bankruptcy Petition was founded on the non compliance by either of the two debtors with the requirements of a Bankruptcy Notice served on them on the 29th May 1985. That notice in turn was founded on a final judgment obtained in the High Court of Hong Kong on 18th December 1984 in the sum of $3,337,179.83 against the two debtors jointly and severally in respect of their liabilities, engaged whilst trading as Wing Hing Lung (Lee Kee). LAU Ming-yuen did not appear to oppose this petition but LAU Ming-tak was represented before me by Mr Chan of counsel. The petitioning creditor has satisfied me as to the Act of Bankruptcy in both cases and no point is taken by Mr. Chan for his client on service of the petition or that the act of Bankruptcy was outside the time for presenting a petition. In short the matter before me is the perennial problem of what is loosely described as "the 15% rule" and the court's attendant, or adjacent, discretion to make a Receiving Order. Mr. Chan and Mr. Fenton appearing for the judgment creditor took me through the recent decisions of various substantive High Court judges in Hong Kong and I have been invited, once again, to decide and hold where the burden of proof lies in relation to the section of the Bankruptcy Ordinance in question and if I have an overriding discretion in applying that section.

3. S.9(3) of Cap. 6 (The Bankruptcy Ordinance) provides as follows:-

Bankruptcy law is said to be entirely a creature of statute but there is a four hundred year history, in England, of tribunals or officials taking possession of the property of debtors for the general body of creditors, and whilst the status of Bankruptcy has become stigmatized the official interference in the debtors affairs is historically partly for the bankrupts benefit - the ultimate object being his discharge from his otherwise permanently enduring obligations, and that I suppose is why the English courts which have no "15% Rule", have always had various residual discretions vested on them for refusing to make a Receiving Order. One of those reasons is lack of assets" and I can do no better than quote from Halsbury (Laws of England Vo1. 3 Bankruptcy) at para. 359 where the learned authors state:

"Lack of Assets.

It is not a sufficient reason for refusing to make a Receiving Order that the debtor has no assets permanently available for distribution among the creditors, since there may be property coming to the debtor between the date of the Receiving Order and the date of the Bankrupts discharge.

However, the Court has a discretion and may refuse to make a receiving order if it is clearly convinced not merely by the debtors statement, but from all the circumstances of the case that there are no assets and no prospect of any coming into existence, and that the only effect of a receiving order would be a waste of costs, especially where there is a previous Bankruptcy still in existence or where the proceedings are of an oppressive character. "

4. But then we have the 15% provision grafted on to the section empowering the Hong Kong courts to make a receiving order, and Mr. Chan, who admitted he went beyond the authorities, submitted not only that on a true construction of s.9(3) of Cap. 6 that the burden of proof lay on the Petitioning Creditor to show that more than 15% of the total debts was available for distribution but that "may" dismiss the petition was an imperative command to the court to do so unless the creditor had discharged his burden.

5. I have been greatly assisted by three decisions of the High Court at first instance all in the last twelve months:

Mantell, J. and Mayo, J. both came to the conclusion that on a proper wording of the Ordinance the burden lies on the petitioning creditor, but Jones, J. who gave his judgment before those of Mantell, J. and Mayo, J., and did not have the benefit of their views, came to his contrary conclusion in a robust and common sense approach to the problem which I with respect find more attractive. Mayo, J. pointed out that the English cases are not particularly helpful as the 15% rule is unique to Hong Kong. He is with respect correct to point out that we are construing a statute not looking for a ratio. I have nevertheless formed the view that one can only construe the section (9(3)) to the extent of finding out where the burden of proof lies by looking at extraneous practical factors. This is not a Taxing Ordinance nor a punitive provision; bankruptcy is historically partly a measure of protection for the debtor.

6. I think the facts of this case may even be relevant to demonstrate where the burden lies. The second named debtor LAU Ming-yuen took no part in those proceedings. Would it be right that on a debt of this magnitude the petitioning creditor (who had otherwise satisfied the court that an Act of Bankruptcy has arisen and has not been compounded and that process has been served and in time) should then have to give evidence to show that 15% of the judgment debt can at this stage, which is prior to the statutory investigation, be collected? If the Legislature had intended that situation to arise it would have said so and provided for a Receiving Order not to be made unless 15% was shown to be available for distribution.

7. I find it impossible to do other than to treat the 15% rule as an attempt to codify the point at which the court arrives at the conclusion that there are no or virtually no, assets, so as to embark upon the exercise of its discretion as to whether or not to make a Receiving Order. The English authorities are clear; the court must be convinced that not only are there no assets but that there will be none. (Re Scott exparte Paris-Orleans Rly. Co. 1913 - cited in Halsbury at a footnote to para. 359, aforesaid). That in my view can only mean one thing namely that the person seeking to show that there are less than 15% worth available assets has to prove it. It might be the debtor, it might be the Official Receiver not wishing to waste public funds, or it might well be another creditor not wishing a scheme of arrangement to be diluted by wastage of costs in Bankruptcy proceedings.

8. In this case it is the Defendant who seeks to show less than 15% worth of available assets. He does that by means of 3 affirmations filed in the course of these proceedings all directed to showing that his assets will be less than 15% of his liabilities and to that extent he certainly might be said to be accepting the burden of proof. Mr. Chan contends that this has been discharged and that his figures must be accepted as the petitioning creditor has not applied to cross-examine the debtor on his affirmations.

9. If I am right and the burden falls on the debtor that burden in to satisfy the court, not to raise an issue or a doubt as to the value of the assets, and where interests in real property are concerned as well as alleged business interests in which the debtor appears to have given, in 1985, notice that he had ceased trading in 1984, 17 months earlier, I cannot say that I am satisfied that there will be less than 15% of the judgment debt available, nor am I satisfied that there will be more than 15% available. On a judgment debt of $3,337,179.83 15% would be $500,000 approximately and that must bear heavily on the court's exercise of its discretion. With a judgment debt of say $10,000,000 would the court be entitled to say that even if the judgment debtor demonstrated positively proof beyond all doubt that only $1,400,000 or 14% was available, that no Receiving Order should be made, whereas at 15% or $1,500,000, it would be proper to make the order? Mr. Bumble would chuckle in his grave and remind us that "if the law supposes that .... the law is a ass ... a idiot".

10. In my judgment the "15% rule" must be and can only be properly construed as an integral element of the entire discretion vested on the court under s.9(3). On a petition for $5000 then 15% might well be a useful yardstick or a clear indication to the court how it should exercise its discretion, since $750 would barely meet the cost of filing the petition.

11. For these brief reasons I have come to the conclusion that insofar as the "15% Rule" imposes an evidential burden on any party it falls upon the person raising the issue and that in this case having been raised by the debtor it has not been discharged by him and that even if it was discharged and on the lowest burden of proof I should still regard myself as vested with an overall discretion, which I should exercise in all the circumstances of this case in favour of the petitioning creditor supported as it is by the Official Receiver. I therefore made Receiving Orders against both Debtors today.

Dated this 27th day of January 1986