Re Hang Seng Bank Ltd

HCB000143/1982

Bankruptcy Ordinance Cap. 6 section 9(3). Fifteen per cent rule - factors which should be considered by the court in exercising its discretion whether to make a Receiving Order. Order made in this case.

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

NO. 143 OF 1982

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Re: HO SUM

Ex-parte: Hang Seng Bank Limited

Coram: The Hon. Mr. Justice 14 Mayo.

Date: 29 April 1983

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DECISION

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1. The Hang Seng Bank Limited (the petitioner) have presented a petition for a Receiving Order to be made against Ho Sum (the debtor). In the petition it is stated that the debtor owes the petitioner $369,849.48 and the act of Bankruptcy relied upon is the debtors failure to comply with the requirements of the bankruptcy notice which was served upon him. In fact the petitioners have not succeeded in establishing contact with the debtor and the petition has proceeded upon a default basis. It is clear from an affirmation sworn by Mr. Lo Wing Tai, an officer of the petitioner sworn on the 15th March 1983 that the petitioners have reason to suppose that the debtor may well be possessed of assets which he has concealed from them. As they have been unable to communicate with the debtor they have been unable to obtain any definite information concerning assets he may possess and they are also unable to avail themselves of the provisions contained in Order 48 of the Rules of the Supreme Court and examine him as to his means and circumstances. In his said affirmation Mr. Lo Wing Tai has expressed the view that if a receiving Order is made the Official Receiver would be in a very much better position to investigate the circumstances of the debtor than they would be in. I have no doubt that this would be correct. For one thing the Official Receiver is able to make inquiries of all bankers in the colony and require them to give any information they may have in heir possession concerning the debtor notwithstanding their rules of secrecy. Also if a Receiving Order is made a meeting of creditors is convened and it is often possible to derive further information from creditors who attend such meetings. In addition to this the Official Receiver is able to exercise coercive powers to obtain the cooperation of a debtor in bankruptcy proceedings. The Official Receiver, who was represented by Mr. Robertson, informed me that it was not his intention to oppose the petition.

2. The problem which arises in this case is occasioned by the provisions contained in Section 9(3) of the Bankruptcy Ordinance Cap. 6. This sub-section reads as follows:-

"(3)    If the court is not satisfied with the, proof of the petitioning creditor's debt or of the act of bankruptcy or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts, or is not satisfied that the assets for division among the unsecured creditors, after payment of all costs, charges and expenses, and the debts which are preferential under this Ordinance, will be sufficient to pay a dividend of 15 per cent, or considers that for any other sufficient cause no order ought to be made, the court may dismiss the petition."

It will be noted that the powers contained in this sub-section relating to assets available for distribution are of a discretionary nature.

3. I propose referring to this discretionary power as being the 15 per cent rule. There is no such provision in the English Bankruptcy Act 1914 Chapter 59. It is therefore perhaps helpful to consider the history of the Hong Kong legislation. The Bankruptcy Ordinance being Ordinance No. 7 of 1891 was based upon the English Bankruptcy Act 1881. Chapter 52. Section 7 of the Ordinance was framed in similar terms to Section 7 of the Act. Section 7(4) was as follows:-

"(4)    If the Court is not satisfied with the proof of the petitioning creditor's debt, or of the service of the petition, or of the act of bankruptcy, or is satisfied by the debtor that he is able to pay his debts, or is satisfied that there are and will be no substantial assets for division among the creditors, or that for other sufficient cause no order ought to be made, the Court may dismiss the petition."

Our present Bankruptcy Ordinance was enacted in 1932 and the 15 per cent rule appears to have been introduced as a novel measure. It is of assistance to see how the Courts have exercised the discretion contained in section 9(3) and in earlier cases how they have dealt with the problem of what requirements there should be for the Court to be satisfied that there were substantial assets so that Receiving Orders could be made I also consider it to be of importance to see how the Courts in England have dealt with the problem of an insufficiency of assets in a bankruptcy.

4. The first problem that is encountered is in ascertaining whether or not there are substantial assets of the order of 15 per cent of the liabilities. A consideration of this problem begs the whole question which has to be weighted by the Official Receiver. Before he is invested with powers to investigate the affairs of the debtor he is  only able at best to hazard a guess in most cases what his investigations will reveal. This problem was considered by Sir William Rees Davies C.J. in Re Ng Ping Sam⁽¹⁾. At page 67 he said:-

"In re Leonard ⁽²⁾ Lord Esher M.R. said 'In the case of In Re Hecquard ⁽³⁾ Lindley and Lopes L. JJ. both point out that, at the time when the petition is presented, and before a receiving order is made, it is impossible to tell whether there will prove to be any assets or not. All the petitioning creditor then knows, or need know, is that a debt is owing to him, and that, after taking the necessary steps to procure payment of that debt, he cannot get payment of it; and therefore he asks that the debtor may be made bankrupt. The Court cannot at that stage tell whether the proceedings in bankruptcy will have no result. If the debtor is made bankrupt, there will be a public examination of him, and then it may be ascertained whether he has any assets. At the time of the petition and adjudication, the Court has not the proper materials for judging whether there are assets or not,' I have cited these words as showing the view of the Court of Appeal as to the general attitude of the Court in making a receiving order."

These observations are particular relevant to the present application. On account of the difficulty experienced by the petitioner establishing any dialogue with the debtor in has not proved to be possible for the petitioner to verify or substantiate any of the suspicions they may have concerning property belonging to the debtor. It is only after a Receiving Order is made that the Official Receiver would be able formally to put in train all of the various inquiries and investigations which are made as a matter of routine by him which would then reveal whether the suspicions of the petitioner can be substantiated. All of this leads me to the conclusion that when a judge is exercising the discretion which is reposed in him in relation to the 15 per cent rule he should take a tentative view of the matter and should only be satisfied that there are insufficient assets if there is definite evidence to this effect. It goes without saying that that the Official Receiver is much more likely to be a reliable source of information than the debtor is himself.

5. The next matter I would turn to is where the burden of proof lies. In this respect I consider that the relevant sections of the Bankruptcy Ordinance Chapter r a Hong Kong and the Bankruptcy Act 1914 Chapter 59 are similar. Section 9(2) of our Ordinance is the sub-section which confers powers upon the Court to make Receiving Orders. It reads as follows:-

"(2)    At the hearing the court shall require proof of the debt of the petitioning creditor, of the service of the petition and of the act of bankruptcy, or if more than one act of bankruptcy is alleged in the petition, of some one of the alleged acts of bankruptcy, and if satisfied with the proof, may make a receiving order in pursuance of the petition."

I think that it is clear from the wording of this sub-section which is framed in similar terms to section 5(2) of the Bankruptcy Act 1914 that a petitioning creditor has a prima facie right to have a Receiving Order made. This view of the matter is borne out by the case of Re A Debtor⁽⁴⁾. The headnote of this case accurately reflects the findings of the Court of Appeal and states:

"(i) the petitioning creditor had a prima facie right to a receiving order unless the debtor established some very special circumstances which justified the court in departing from its usual practice."

It makes good sense that this should be so. It also makes good sense that the Court should exercise considerable caution before it comes to a conclusion that a debtor has no assets and it would be a waste of time and money for the Official Receiver to administer the affairs of the debtor. This view seems to have been accepted in the judgment of Megarry V.C. In re Field ⁽⁵⁾ he says at page 376:

"As Lord Esher pointed out at page 52, if a debtor merely swears an affidavit saying that it is no use making him a bankrupt because he has no assets and no prospects of having any, the court will not accept this as a ground for not making a receiving order, because at that stage the court is not in a position to know whether that statement is true. During the process of bankruptcy much that was unknown earlier becomes revealed. In In re Jubb, Ex parte Burman and Greenwood ^(6), the debtor contended that a receiving order ought not to be made because the assets available for distribution would probably be less than the costs of the bankruptcy proceedings; but this contention was rejected. Vaughan Williams J. pointed out at page 645 that in the course of the bankruptcy proceedings it was quite possible that the assets available for distribution would be found to be larger than they presently appeared to be. In re Leonard, Ex parte Leonard ⁽²⁾ makes it clear that the apparent non-existence of assets is no ground for refusing to make a receiving order; for as Lord Esher said at page 475: 'The court cannot at that stage tell whether the proceedings in bankruptcy will have no result.' Mr. Kirsten placed some reliance on the affairs of the debtor in the present case having been to some extent investigated when the instalment orders were made; but that process is far less rigorous than bankruptcy, and in arty case each resulted in orders being made not on the basis that the debtor could pay nothing, but on the basis that he could pay something."

6. The final case I propose referring to is the Hong Kong case of Re: Noel Earnest Lee ⁽⁷⁾. This is the least favourable case to the petitioners. In that case Mr. Justice Leonard declined to exercise his discretion in favour of the petitioning creditor. It is however significant to note that in that case both the debtor and the Official Receiver opposed the application. Mr. Justice Leonard came to the conclusion that no useful purpose was likely to be served by making a Receiving Order. It may be the case that the Official Receiver came to the conclusion that he should oppose the proceedings after some investigation of the affairs of the debtor. Be that as it may, I am satisfied that the Official Receiver's opposition to a Receiving Order being made creates an entirely different situation to the one which exists in the present case. I would also observe that in Noel Earnest Lee ⁽⁷⁾ the debtor did give evidence concerning his affairs. While the Court might not have accepted all of his evidence it might nonetheless less have been satisfied that there were few assets available and on the balance of convenience it was better that a Receiving Order should not be made. I would also observe that it does not appear from the report of the case that Mr. Justice Leonard considered any English authorities. Had he done so it may quite possibly have been the case that his decision would have been otherwise.

7. Having considered all of the above cases I think that various principles emerge. The first is that the circumstances of all the cases are very different and accordingly some caution has to be exercised in applying any principles too rigidly. The second is that only a most tentative view can be taken of any information which may be available at the time when the petition is first heard. It is not known what information will be derived from the investigation which is undertaken by the Official Receiver. In all probability the Official Receiver is the officer best qualified to form a view as to whether a Receiving Order should be made. Perhaps the most important factor which should be borne in mind by the court is the attitude adopted by the Official Receiver. If he is prepared to support the application I would imagine that there would be very few occasions when the Court would be disposed not to make a Receiving Order. The opposition of the debtor would be  a much less weighty matter. His view of the matter might well be coloured by self-interest and other extraneous considerations. Where however a debtor has not come forward with some explanation concerning his affairs and has not given evidence to the effect that he has no assets the Court should be prepared to accept that there nay well be sufficient assets to justify the Receiving Order being made if the petitioning creditor as any reason to suppose that there may be assets available for distribution.

8. In considering all of these matters I came to the conclusion that I should make a Receiving Order in the present case. Accordingly I made a Receiving Order. I was however informed by Mr. Robertson that there is presently confusion in the minds of some practitioners what attitude is likely to be adopted by the Court in the exercise of this discretion. It is for this reason that I have prepared these written reasons which I hope may be of some assistance to practitioners. I further order that the petitioners' costs be taxed and paid out of the estate.

(1)    (1915) H.K.L.R. 65.

(2)    (1896) 1 Q.B. 475.

(3)    24 Q.B.D. 71

(4)    (1949) 1 A.E.R. 652.

(2)    (1896) 1 Q.B. at page 473.

(5)    (1978) 1 Ch. 371.

(6)    (1897) 1 Q.B. 641.

(7)    (1974) H.K.L.R. 313.

Representation:

Mr. B. Yu (C.Y. Kwan & Co.) for Petitioning Creditor.

Mr. A.L. Robertson for Official Receiver.