Ng Yim Pui v. Shanghai Commercial Bank Ltd

HCB000008/1971

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

No. 8 of 1971

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Coram: Huggins, J.

Date of Judgment: 24th September, 1971.

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JUDGMENT

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1. This is an application by the Petitioners, the Shanghai Commercial Bank Ltd., for rescission of a Receiving Order in bankruptcy made on the ground that process in execution had been levied against the Debtor by seizure and sale of his goods. The judgment Creditor was the Chartered Bank Ltd. The Debtor was trading as a manufacturer of rubber goods. The total of debts so far proved amounts to $393,165.87 but I am informed by the Official Receiver that debts amounting to a further $81,000. are sought to be proved. The total assets notified to the Official Receiver amount to $42,015.59. There is a likelihood that a dividend of about 8% might be paid if the present application is refused.

2. The application is not opposed but, on the other hand, it is not supported either by the other Creditors or by the Official Receiver. The first meeting of Creditors unanimously resolved "the the Debtor be not adjudged bankrupt and that a scheme or composition be prepared by the Debtor and put forward for consideration of the meeting". At the adjourned hearing a proposed scheme of arrangement was rejected. At the second meeting of Creditors those present would move no resolution, being apparently undecided whether they should let the bankruptcy proceedings take their course. As I understand it, the uncertainty arises principally from the fact that the Debtor is tenant of pre-war premises on a site which the landlord has plans to re-develop. If those plans are put into effect the Debtor might possibly receive a substantial sum by way of compensation, but the Official Receiver says that as he understands the position the right to such compensation does not pass to the trustee on adjudication: it is personal to the Debtor. I think that may not be an accurate way of putting it. There can be no right to compensation until a condition of payment of compensation has been imposed upon the landlord and accepted by him. Once such a right has arisen I see no reason why that should not be property which vests in the tenant's trustee in bankruptcy. What I think must have been meant was that if the contractual tenancy has already been determined (as to which I have no evidence) all the Debtor now has is a status of irremovability, which would not pass to the trustee. If, on the other hand, the contractual tenancy still subsists the trustee would in theory be a tenant who could oppose an application for exemption under s.38 of the Landlord and Tenant Ordinance. In the one case it is possible that the Debtor might himself acquire a right to compensation, but there might be difficulty in bringing the money into account in the bankruptcy: in the second case it might be that the Governor in Council would not see fit to impose a condition of payment of compensation.

3. The Debtor is indebted to the Petitioners in the sum of $51,859.95. They have come to an agreement with the Debtor that if the Debtor pays them $10,000.00 in cash, executes a promissory note in respect of the balance of their debt and (as I understand it) obtains a guarantee for payment of such balance by his wife, then upon payment by the Debtor of $1,000 towards their costs they will agree to rescission of the Receiving Order.

4. If rescission is ordered the Petitioners will gain by receiving approximately 20% of their debt in cash, together with a substantial payment on account of costs, and will thereafter be "at risk" only in respect of the balance of $41,859.95. The Chartered Bank will gain by having released to them the proceeds of their execution, namely $39,000.00, which sum represents about 25% of their debt.

5. It seems to be accepted that the Court will normally grant rescission only in those cases where annulment of a Receiving Order would be ordered: In re a Debtor⁽¹⁾. In England annulment will be ordered only where the debts have been paid in full or where the Receiving Order ought not to have been made: s.29 of the Bankruptcy Act 1914. In Hong Kong there is a third ground for annulment, namely that the assets divisible among the unsecured creditors are not and will not be sufficient to pay a dividend of 15%: s.33(1) of the Bankruptcy Ordinance. It is this strange provision which has caused me difficulty in the present case. Two possible explanations have been suggested for its enactment. First, it may have been designed to avoid lengthy proceedings which will produce a benefit to the creditors out of all proportion to the cost involved. Secondly, the object may have been to prevent a debtor's obtaining the advantages of bankruptcy where his conduct has led to his being able to pay only a very small proportion of his debts. What in fact it was hoped to achieve I do not pretend to know and I confess that it seems to me a most unsatisfactory provision. If the second suggestion indicates the true purpose of the Legislature it seems to have been overlooked that injustice must result to all but the first creditors to obtain payment, as would probably be the case here.

6. This provision has been considered in two reported cases. In the first, Re CHAN Tsz-cheuk⁽²⁾ (which was decided under the Bankruptcy Ordinance, 1891), the court in the exercise of its discretion annulled an adjudication at the instance of the Official Receiver on the ground that there were not "substantial assets". In Re The Mow Sang Tong⁽³⁾ the court declined to annul an adjudication at the instance of an execution creditor although the available assets were well below 15% of the unsecured debts. At p.79 Sir Atholl MacGregor, C.J. said:

"

I have in previous cases stated that in my opinion the fifteen per cent. provision is not the only factor which one is entitled to look at. In other cases I have taken it together with relevant factors - the wishes of the majority of the creditors and the actual amount available for distribution. Those are not the only factors. Probably each case that comes before the Court may present yet another factor of equal importance. But those are, in such a case as the present, the dominant factors."

7. Although s.33 is discretionary the discretion is a judicial one: I must endeavour to give effect to the intention of the Legislature so far as it is ascertainable and I think it is right that I should on a point of this kind follow a case which has stood unquestioned since 1935.

8. In this type of case the interest of three main bodies of persons apart from the petitioning creditors and the debtor are at stake - (a) the other creditors, (b) the public at large and (c) those members of the public who might hereafter give credit to the debtor if he were enabled to resume business. In the present case the other creditors appear to think that there may possibly be some advantage to them in allowing the Debtor to resume business, although I am not sure they fully appreciate the possible effects of an order of rescission. The presence or absence of their consent is only one of the elements in the case and too much weight must not be attached to it.

9. The public at large are concerned that proper standards of commercial morality are maintained. As to that I am told that the Debtor is at fault in failing to produce books of accounts for the year 1970 and that his only excuse is that he left someone else to keep the books. No other default has come to light, although of course the absence of these books has considerably hampered the inquiry which could be made.

10. It is the third class of persons which has been most in my mind since I first saw the papers, but, as we have seen, the existence of s.33(1) suggests that the Legislature in Hong Kong attaches less weight to the danger to this class of persons than does Parliament in England. It was suggested in argument that the rubber trade is somewhat specialised and that all those engaged in it are likely to know of the present proceedings and therefore to be on their guard when considering any request for further credit from the Debtor. That may be so, but I have no reason to believe that requests for credit would be addressed only to persons in the rubber trade. As was said by Cave, J. in In re Hester⁽⁴⁾:

"The Court must consider the position of the debtor, the possibility of his getting over his difficulties, and the interests of the public. It is clearly contrary to their interests that a man who is insolvent should be allowed to go on trading. In fact, it is on offence under the Act for a trader to continue trading after he knows that he is insolvent."

The Debtor here, as was the debtor in that case, is hopelessly insolvent: I see no reason to believe that his business is likely to improve. The only factor which might affect his financial position for the better is the possibility - and it is nothing more than a mere possibility - that this compensation will be paid. Although a figure of $500,000.00 was mentioned in the course of the argument there is no certainty that if compensation were awarded it would be as much as that. On the other hand there is, in my view, a very real danger that any compensation which might become payable would, at least to some extent, be offset by further losses if, as appears to be his intention (for the Official Receiver reports that he understands the Debtor "has a financial backer"), he attempts to re-establish his business by further trading.

11. I have hesitated long because I am not at all happy that it is in the public interest that this Receiving Order should be rescinded. Had there been any opposition at all I would certainly have dismissed the application but, as it is, I have come to the conclusion that there are not sufficient grounds upon which I can follow the course which my instinct says I ought to follow. I sincerely hope that the desirability of retaining the distinction which s.33(1) creates between the law of Hong Kong and the law of England will be seriously considered.

12. The application is allowed.

24th September, 1971.

Representation:

(1) 1971 1 W.L.R. 1212.

(2) (1927) 22 H.K.L.R. 125

(3) (1935) 27 H.K.L.R. 78.

(4) (1889) 22 Q.B.D. 632,635.