Fred Lee and Another v. Wong Hing Wah Michael

HCB 26018/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 26018 OF 2002

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BETWEEN

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Before : Hon Barma J in Chambers

Date of Hearing : 3 August 2007

Date of Judgment : 12 October 2007

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J U D G M E N T

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Introduction

1.On 17 December 2002, Mr Michael Wong Hing Wah (“Mr Wong”) presented a petition for his own bankruptcy.  On 24 February 2003, a bankruptcy order was duly made against him.  Subsequently, Mr Fred Lee and Ms Christine Chow (“the Trustees”) were appointed as Mr Wong’s trustees in bankruptcy.

2.Ordinarily, Mr Wong, who was a first-time bankrupt, would have been automatically discharged from his bankruptcy on 24 February 2007, four years from the date of the bankruptcy order against him (see sections 30A(1) and (2) of the Bankruptcy Ordinance (Cap. 6)).

3.However, the right to an automatic discharge is not absolute.  The court may suspend it on the application of the trustee in bankruptcy or a creditor of the bankrupt, if the court is satisfied that a valid objection to the discharge has been made (see section 30A(3) of the Ordinance).  In the case of a first-time bankrupt, the court may suspend the automatic discharge for up to four years, so that the bankrupt may not be discharged from bankruptcy until eight years after the making of the bankruptcy order.

4.The grounds on which an order suspending an automatic discharge may be made are specified in section 30A(4) of the Ordinance.

5.In the present case, the Trustees have objected to Mr Wong being automatically discharged from bankruptcy.  By their application made on 8 January 2007, about six weeks before Mr Wong would have received his automatic discharge from bankruptcy, they seek an order that the relevant period for the purposes of section 30A of the Ordinance (i.e. the four year period mentioned in section 30A(2)(a)) should be suspended for such period as the court might think fit.

The grounds for the Trustees’ objection

6.The grounds on which the automatic discharge of Mr Wong from his bankruptcy are objected to were set out in an affirmation made by Mr Lee made in support of the application.  Two matters were relied upon.  Both were said to demonstrate unsatisfactory conduct on the part of Mr Wong in respect of the period before his bankruptcy.  Section 30A(4)(d) of the Ordinance provides that it is a ground for objection to discharge:

“	that the conduct of the bankrupt, either in respect of the period before or the period after the commencement of the bankruptcy, has been unsatisfactory”.

7.The first matter relied on was that the Trustees considered that Mr Wong had conducted himself unsatisfactorily in obtaining an loan of HK$100,000, repayable in instalments over a period of three years, from GE Capital (Hong Kong) Limited (“GE”) on 30 January 2002, when he had at that time some 11 other loans outstanding and, in addition, debts on nine credit cards.  According to the Trustees, at the time that the GE loan was obtained, Mr Wong would already have had to meet monthly payments in respect of his existing debts of somewhat over HK$33,000, when his income was only HK$32,000.

8.The second matter relied on was that the Trustees considered that Mr Wong had conducted himself unsatisfactorily in November 2002, by using HK$135,000 out of a severance payment of HK$179,000 odd received by him in three parts between 22 October 2002 and 4 December 2002, to make repayments in respect of loans which he had obtained from a friend and from his mother.  The Trustees are of the view that such repayments constituted unfair preferences, which were made at a time when Mr Wong must have known that he was not in a position to pay all of his debts, and only a matter of weeks before he was to present his petition for his own bankruptcy.

The parties’ contentions

9.At the hearing, Mr Chan, the solicitor appearing for the Trustees, maintained that both of these matters constituted unsatisfactory conduct on the part of Mr Wong, within the meaning of section 30A(4) of the Ordinance, and that the court ought to express its disapproval of such conduct by suspending Mr Wong’s discharge from bankruptcy for a period of time.  He did not, however, make any submissions as to the length of suspension that might be appropriate.

10.On the other hand, Mr Ip, appearing for Mr Wong, submitted that neither of the matters complained of amounted to unsatisfactory conduct, and that even if they did, they were relatively minor in nature, so that even if the court’s discretion under section 30A(3) were engaged, no suspension should be imposed.

The approach to the exercise of the discretion under section 30A(3)

11.As has been observed in a number of decisions, the introduction of the present section 30A of the Ordinance marked a significant change in the approach of the law towards bankrupts.  Previously, there was no provision for automatic discharge.  A bankrupt had to apply for his discharge, and it was generally difficult for him to obtain it.  The effect of the change has been to place the emphasis on rehabilitation of the bankrupt so as to enable him to resume a normal life (see e.g. Re Hui Hing Kwok [1999] 3 HKC 683, per Le Pichon J at 687B).

12.So far as the power under section 30A(3) to suspend the automatic discharge of a bankrupt is concerned, it is, I think, clear that one of its main purposes is to provide the bankrupt with an incentive to cooperate with his trustee, and to comply with his obligations under the Ordinance.  However, this cannot be its only purpose.  If it were, there would be no point in including among the grounds for objection any reference to the pre-bankruptcy behaviour of the bankrupt.  Other purposes that are served by the power to suspend automatic discharge would appear to me to include the protection of the public, where there is reason to think that the reintroduction of the bankrupt into ordinary commercial life might pose risks or dangers against which lenders and others who might have dealings with him should be protected, and, in appropriate cases, as a mark of disapproval of the way in which the bankrupt has conducted his affairs whether before or after his bankruptcy.

13.The court has recently considered the approach which should be adopted to objections to discharge in cases involving allegedly unsatisfactory pre-bankruptcy conduct in Lee Fred v Leung Chin Yeung [2007] 1 HKC 164 (Kwan J), Re Tong Yuk Kin (unreported, HCB 22870/2002, Deputy Judge A To, 20 June 2007) and Re Liu Man Hoo (unreported, HCB 11719/2002, Lam J, 14 September 2007).  I should point out that the last of these decisions was given after the hearing in this matter concluded, and was not the subject of submissions by either party.  However, the approach adopted in it is, I think, broadly in line with that taken in the other two decisions.

14.These authorities make it clear that there are two stages involved when the court is considering the exercise of its powers under section 30A(3).  It is first necessary to determine whether one or more of the grounds mentioned in section 30A(4) has been established.  If this is done, the court then moves on to consider whether or not, in the exercise of its discretion, a suspension of the automatic discharge that would otherwise have been available to the bankrupt should be ordered.  It will not be in every case where a ground for suspension is made out that a suspension will be called for or imposed.  In determining whether or not a suspension should be ordered, the court will have regard to all the circumstances of the case, including the nature of the acts complained of and the post-bankruptcy conduct of the bankrupt.

15.Where, as here, the ground for suspension relied upon is unsatisfactory pre-bankruptcy conduct, the question arises as to what conduct is to be considered unsatisfactory.  In Leung Chin Yeung (supra), it was common ground that the threshold was a low and broad one.  In Tong Yuk Kin, however, Deputy Judge A To suggested (at paragraph 16 of his judgment) that in most cases, the court should not conduct too detailed an analysis of the conduct which led to the bankrupt’s insolvency, but should assume in the bankrupt’s favour that his conduct before his bankruptcy had been satisfactory, and that in this sense, the threshold should be regarded as “very high”.

16.However one regards the height of the threshold, it seems to me that the appropriate test for whether or not the conduct complained of is to be regarded as unsatisfactory is, as Deputy Judge A To put it (in paragraph 17 of his judgment), whether the conduct is such as society would be prepared to condone without any expression of disapproval.  If it is not, the conduct in question will be unsatisfactory.  In each case, the conduct complained of will have to be examined against all the relevant background facts, and consideration given as to whether or not the hypothetical reasonable man would regard it as unsatisfactory.

17.If it is concluded that the conduct complained of is unsatisfactory, the court moves on to the second stage of considering whether or not it should exercise its discretion to order a suspension of the automatic discharge of the bankrupt, and if so, what length of suspension is called for.  At this stage, it will be appropriate to consider not only the conduct complained of, but also other factors such as the post-bankruptcy behaviour of the bankrupt.

18.In Liu Man Hoo (supra), Lam J suggested (at paragraph 65 of his judgment), and I agree, that the court should take an overall view of the matter when exercising its discretion under section 30A(3).  He went on to suggest that a suspension of automatic discharge on the grounds of unsatisfactory pre-bankruptcy behaviour should only be ordered in the case of conduct of exceptional gravity, having regard to the primary rehabilitative purpose of the automatic discharge provisions (see paragraphs 66 to 68 of his judgment).

19.While I would agree that not all forms of unsatisfactory pre-bankruptcy conduct will lead to a suspension of the bankrupt’s automatic discharge, I would, with respect, hesitate to limit the circumstances in which a suspension might properly be ordered to cases of “exceptional gravity”.  Whether a suspension is merited will, I think, depend in part on the nature of the conduct in question and in part on such factors as whether or not the bankrupt has been cooperative with his trustee, whether or not he has complied with his obligations under the Ordinance, and his general conduct of his affairs during his bankruptcy.  Thus, for example, the fact that a bankrupt has been cooperative, or has made real efforts to contribute to his estate, are factors that can be taken into account in his favour, which may dispose the court to exercise its discretion against the imposition of any period of suspension, or to impose a lesser period of suspension than might otherwise have  been ordered.  In Liu Man Hoo, no suspension was ordered, notwithstanding that Lam J considered that the bankrupt had been guilty of unsatisfactory pre-bankruptcy conduct.  However, in that case, the bankrupt had made real and substantial efforts to contribute to his estate, and his conduct post-bankruptcy was described by Lam J as “unassailable”.  Moreover, the evidence in respect of the allegedly unsatisfactory conduct would appear to have been sketchy and incomplete, and insufficient to enable the court to form a view as to whether or not it was so unsatisfactory as to merit any suspension of the automatic discharge.  In those circumstances, it is perhaps not surprising that no automatic discharge was ordered.

20.That said, bearing in mind the policy of rehabilitation, I would accept that save in very serious cases, a suspension of automatic discharge in respect of unsatisfactory pre-bankruptcy conduct is likely to be for a shorter period than might be ordered in a case in which a bankrupt had been guilty of other, post-bankruptcy ground for suspension, where a longer period of suspension may well be called for so as to ensure that the bankrupt properly complies with his obligations.

Whether the behaviour complained of was unsatisfactory

21.In my view, there can be no doubt that the matters complained of constituted unsatisfactory conduct on the part of Mr Wong.

22.So far as the complaint in relation to the loan from GE is concerned, it is necessary to consider the circumstances in which the loan was applied for and made.  At that time, Mr Wong was already indebted to lenders in respect of 11 other loans, which he had obtained between November 1997 and early January 2002.  Details of the loans are set out in paragraph 26 of Mr Lee’s first affirmation, from which it appears that five of the loans were instalment loans, in respect of which the total of the monthly instalments payable was a little over HK$15,000.  There were also four revolving loan facilities, totalling HK$216,000, and two overdraft facilities.  There were also outstanding debts on nine credit cards.  The Trustee’s estimation (which has not been challenged by Mr Wong) is that the monthly repayments in respect of the credit cards would have been in the region of HK$12,600, and that a further HK$5,000 a month would have been needed to service the revolving loans.

23.It would also seem that at this time, Mr Wong was indebted to his mother to the extent of about HK$50,000 and to a friend for an amount of over HK$85,000.

24.Mr Wong’s own evidence is that at the time he took out the GE loan he knew that his income (then HK$32,000) was insufficient to meet his monthly repayment obligations.  He says, in essence, that he tried to meet his minimum payment obligations on his credit card debts out of his income, and used whatever remaining credit was available to him to meet payments due under the instalment and other loans, and that he hoped to carry on by refinancing where possible on better (or at any rate) easier payment terms, involving smaller monthly payments, and by hoping that his salary might increase over time.

25.Quite apart from his loan repayments, however, Mr Wong was also spending some HK$25,000 per month on his personal expenses.  He accepts that he succumbed to the temptation of living beyond his means.

26.On this basis, it would seem that Mr Wong was, by around January 2002, earning HK$32,000 per month, spending HK$25,000 on himself, while he had monthly repayment obligations of about HK$32,000 per month as well.  Given that he appears to have appreciated this position, although he says that he was unaware of the precise amount of his total indebtedness, it must have been obvious to him that this was not a state of affairs that could continue forever.

27.In these circumstances, there can be little doubt that it was not satisfactory conduct on his part to borrow further by obtaining the loan from GE at a time when he was heavily in debt, unable to meet his ongoing obligations from his own income, and apparently reliant on new borrowings to keep up with his existing obligations.  This is, in my view, clearly conduct which the hypothetical reasonable man would view with disapproval.

28.As for the second matter complained of, namely the disposal of the bulk of the payment he received on the termination of his employment with an earlier employer by using it to repay his mother and friend the loans which they had extended to him, it seems to me that this, too, is clearly unsatisfactory conduct on Mr Wong’s part.

29.Mr Wong says that at the time that he made the repayments, he did so because he was in debt to his mother and his friend, that he was unaware of the law relating to unfair preferences, and that he was in any event not thinking of petitioning for his own bankruptcy, as he was managing to keep current with payments due on his various loans and credit card debts.

30.I do not think that these matters amount to an excuse.  Mr Wong’s bankruptcy was not the result of unexpected action taken by one of his creditors, which he might not have foreseen.  He was made bankrupt on his own petition, which was presented a matter of weeks after he made the repayments in question.  It must have been obvious to him that by choosing to repay his mother and his friend, he was depriving his other creditors of the benefit of the payment he received on the termination of his employment, and I am not satisfied that he did not then have in mind the possibility of petitioning for his own bankruptcy.

31.Moreover, the impact on his other creditors was substantial.  By paying away this amount of HK$135,000, Mr Wong removed it from what would otherwise have been available for payment or distribution to his other creditors.  This was not an insignificant amount, since it represented in excess of 10% of his debts (some HK$433,000 being owed to the 12 loan creditors, including GE, and a further HK$600,000 odd to the credit card creditors).  Moreover, the total recovery by the Trustees has been only some HK$38,000 odd (not taking account of funds in the hands of the Official Receiver of some HK$43,000 odd, which may or may not be available for distribution to Mr Wong’s creditors).

32.In the circumstances, I have no hesitation in concluding that this was unsatisfactory conduct of a serious kind, which would not have been condoned by the hypothetical reasonable man.

33.Given that Mr Wong has been guilty of unsatisfactory pre-bankruptcy conduct, section 30A(3) is engaged, and I turn to consider how my discretion should be exercised in this case.

Exercise of discretion

34.In the present case, I bear in mind that the Trustees do not complain of any unsatisfactory behaviour or lack of cooperativeness on the part of Mr Wong after his bankruptcy.  This counts in his favour.  However, unlike the bankrupt in Liu Man Hoo, Mr Wong does not appear to have made any significant contributions to his estate.  Although this does not count against him, it does mean that this factor, which was present in the Liu Man Hoo case, is not available to assist Mr Wong here.

35.In Leung Chin Yeung (supra), Kwan J expressed the view (at paragraph 45 of her judgment) that excessive borrowing per se, at a time when the bankrupt ought to have known that he would not be able to repay his debts, should not attract any suspension of automatic discharge, at least where the bankrupt has been cooperative with his trustee and has made contributions to his estate.  I would respectfully agree with this view.  Had this been the only complaint made in the present case, I would not have thought it right to order any suspension of the automatic discharge that would otherwise be available to Mr Wong.

36.However, this is not the only complaint.  There is also the complaint in relation to the preference afforded by Mr Wong to his mother and friend, at a time when he was, or must have been, well aware of his inability to meet all of his debt obligations, and was shortly to petition for his own bankruptcy.  As I have already said, this constituted a serious form of misconduct on Mr Wong’s part, and it calls, in my view, for a period of suspension to be imposed as a mark of disapproval of such behaviour.  While many bankrupts might be guilty of overextending themselves through excessive borrowings, it is to be hoped that relatively few would indulge in making repayments to their friends and relatives at the expense of their other creditors.

37.Taking account of the fact that there are no complaints as to Mr Wong’s post-bankruptcy conduct, and that he appears to have provided information to the Trustees as and when required, I have come to the view that a suspension of Mr Wong’s automatic discharge for a period of four months would be sufficient in this case.  Accordingly, I shall order that the relevant period under section 30A(1) of the Ordinance shall cease to run, in the case of Mr Wong, for a period of four months.  The effect will be that he is to be treated as having been discharged from his bankruptcy on 24 June 2007.

Timing of the application

38.Although Mr Wong is to be treated as having been discharged from his bankruptcy on 24 June 2007, he was in effect left in the position of being bankrupt until 3 August 2007, the date of the hearing in this matter, by virtue of the suspension of his automatic discharge on an interim basis, from the time of the application until the time of its hearing, in accordance with the usual practice which has been adopted in these cases.  At the end of the hearing, I removed the suspension which had been imposed on an interim basis, as I was of the view that any suspension that should be imposed in this case would be for a period shorter than the de facto suspension which had already taken place.

39.Nonetheless, Mr Wong has been left in a position where he was a bankrupt for some five or six weeks longer than he should have been.  This is clearly not a satisfactory situation, and as to this, I would respectfully agree with the views expressed by Lam J in Liu Man Hoo as to the desirability of trustees in bankruptcy making applications of this nature at a reasonably early juncture, particularly where reliance is placed, not on post-bankruptcy conduct, but on pre-bankruptcy conduct, in respect of which investigations can reasonably be expected to be carried out in the earlier stages of the bankruptcy process, and certainly in good time for an application to be made so that it can be heard, if at all possible, before the bankrupt would otherwise have been entitled to his automatic discharge.

40.In the present case, it is unfortunate that the application was not made until close to the time limits provided for in the legislation.  It would seem that most, if not all, of the information on which the Trustees have relied for the purposes of this application was available to them by as early as 2004, so that there should have been no real difficulty in bringing the application earlier than it was in fact brought.

Costs

41.Given that Mr Wong has been unsuccessful in his opposition to the application, I see no good reason why costs should not follow the event, and I make an order nisi that Mr Wong is to pay the Trustees’ costs of the application, to be taxed on the party and party basis if not agreed.

Mr. Jacky Ip, instructed by Messrs Yip, Tse & Tang, for the Respondent/Bankrupt

Mr. Edward Chan of Messrs Chan, Wong & Lam, for the Applicant