Re Tung Wan Hoi Kee Products Factory (A Firm)

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

NO.19 OF 1971

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Re: Tung Wan Hoi Kee Products Factory (a firm)

Ex Parte: The Official Receiver

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Coram : Blair-Kerr, S.P.J., in Chambers

Date : 14 February 1972

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D E CI S I O N

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1. This is an ex parte application by the Official Receiver for directions under r.158 of the Bankruptcy Rules.

2. The debtor has not made any proposals for a composition or scheme of arrangement. At the first meeting of creditors held under s.17 of the Bankruptcy Ordinance a proposal by one creditor that the debtor be adjudged bankrupt was not carried. Another creditor, who had a judgment against the debtor and who had levied execution, then proposed that the debtor be not adjudged bankrupt; and this resolution was carried. This latter creditor was in a position to exercise approximately 90% of the voting power; and he stands to gain considerably if the debtor be not adjudicated bankrupt. [s.46(2) of the Ordinance].

3. The Official Receiver’s report to the court reads in part:-

“... some doubt has ... arisen regarding the interpretation of .... sections 17(1) and 22(1). It has now been suggested that in view of the wording of the said section 17, it may be that in the absence of a composition or scheme of arrangement, the only proposal that can be considered is adjudication in bankruptcy and that a proposal of non-adjudication in bankruptcy is ineffective and invalid. Moreover, it may be that if this is the case, then ‘pass no resolution’ in terms of s.22 is applicable and in consequence the court has the power to adjudge (the debtor) a bankrupt.”

The Official Receiver requests the court:-

“(i) to direct whether the ordinary resolution passed at the statutory first meeting of creditors of Tung Wan Hoi Kee Products Factory for the non-adjudication in bankruptcy of (the debtor) is valid and effective; or

(ii) to direct that in terms of s.17(1) of the Bankruptcy Ordinance, no resolution for the non-adjudication in bankruptcy is valid and effective and in consequence the court is able to adjudge (the debtor) bankrupt in terms of s.22(1) of (the Ordinance) in that no resolution has been passed ....”.

4. These questions were indirectly considered by Sir Raymond Evershed, M.R., in Re Fletcher ex parte Fletcher v. Official Receiver(1). Much of his judgment is concerned with the vires of one of the English bankruptcy rules, which rule we do not have in Hong Kong. However, the judgment contains some valuable observations on the history of bankruptcy jurisdiction (which is, of course, entirely statutory). I might mention the following passages. At p.595, the Master of the Rolls said:-

“The Act of 1883 introduced for the first time the innovation of the receiving order …… The effect of a receiving order, as its title implies, is not to divest the debtor of his assets for distribution among the creditors, but to require the Official Receiver to receive and hold them, the debtor being thenceforward in general, protected from proceedings against him by his creditors. The purpose of the receiving order is, I think, quite plainly, to give to the creditors an opportunity of deciding whether, as an alternative to adjudication, they would be prepared to accept a proposal for a composition or scheme of arrangement ...... The operation of the receiving order was, and is, intended .... to be of strictly limited duration. As was said in this court in Re de la Forte(2) ……:-

“.... the legislature does not think that it is desirable that there should be a large class or a small class of men against whom a receiving order has been made and who occupy that peculiar status for an indefinite time. The view of the legislature is that under ordinary circumstances, unless a scheme is accepted either at the first meeting or at one adjournment thereof, then on the application of the Official Receiver the debtor may be adjudicated bankrupt.’”

5. Section 13 of the Bankruptcy Act 1914 is in terms identical to our s.17. At p.600 of the A.E.R. report of Re Fletcher(1), the Master of the Rolls said:-

“... the effect of s.13 may be said to be that the creditors: are given the choice of two alternatives viz. (a) accepting a composition or scheme or (b) resolving that the debtor be adjudicated. The creditors are not, according to the argument, entitled to embark on a third course, declining to accept a composition but resolving that the debtor be not adjudicated; a course which might be said to be an usurpation by the creditors of the powers and duties of the court: see Re Lord. Thurlow Exp.Official Receiver(3) where Lord Esher, M.R., said .... ( p.729 ):-

“The administration of bankruptcy matters from beginning to end takes place under the supervision and absolute control of the Court of Bankruptcy, except so far as its powers are limited by Act of Parliament. It is not for the creditors in the case to decide how the bankruptcy law shall be administered; the court constantly overrules their views, if it thinks they have been persuaded to agree to some course which the court thinks an improper one ....’

So, counsel argued, the words ‘no resolution’ in thephrase in s.18(1) ‘if the creditors ... pass no resolution.’ should be interpreted as equivalent to ‘no relevant resolution’; and the resolution passed by the creditors at the adjourned meeting, ..., was not a relevant resolution, not a resolution which it was, for the purposes of the section, competent for the creditors to pass.

Counsel for the debtor conceded that some limitation must be put on the words ‘no resolution’ …………. On the other hand, if Parliament had meant that the courts’ duty should arise if the creditors did not pass a resolution in favour of adjudication, it would have been easy enough to say so. In the circumstances, ……, I prefer to express no view on the question.”

6. As I have said, this is an ex parte application and I would prefer, if possible, to express no concluded view on the questions posed. But my first impression is this: The debtor has committed acts of bankruptcy; and prior to 1883 the court would have made an adjudication order. But under the modern practice, a receiving order is made in the first instance to give the creditors an opportunity of considering whether to accept a composition or scheme.

7. If a debtor does not propose any composition or scheme, it seems to me that the creditors have no alternative but to resolve that the debtor be adjudged bankrupt. Under s.17 the issue is : whether to accept the debtor’s proposals for a composition or scheme, or whether to apply for an adjudication order. If, of course, the debtor has proposed a scheme, it may be expedient that the meeting should be adjourned for consideration of the debtor’s proposals. It may be expedient that the debtor should be publicly examined before any decision is reached. Despite the existence of proposals for a composition or scheme of arrangement, it may be expedient that the debtor should be adjudged bankrupt at once. Be that as it may, I do not think that, in the absence of any proposals by the debtor for a composition or scheme, the word “expedient” in s.17(1) means that it is open to the creditors to resolve that the debtor be not adjudged bankrupt if upon the clearest evidence that he has committed acts of bankruptcy, the court has made a receiving order.

8. If, however, I am wrong in this, I am quite satisfied that the court’s hands are tied nowadays by the express provisions of ss.18(3), 20(16) and 22(1); that is to say the court does not have an over-riding power to make an adjudication order in any circumstances whatsoever. Therefore the question is: what is the meaning of the expression “if the creditors .... pass no resolution” in s.22(1)?

9. As at present advised, I am inclined to think that this expression means: “if the creditors …… pass no resolution which is open to themunder the provisions of s.17(1).” Therefore as I take the view that the only resolution open to the creditors in the circumstances was that the debtor should be adjudged bankrupt, my view is that the creditors did not pass any resolution under s.17(1).

10. That being so, it will be open to the Official Receiver to apply for an adjudication order in due course. However, notice of the application should be served on the creditors Tai Wing Hong so that they may have an opportunity of appearing and arguing against the making of such an order.

Miss J.C. Smith for the Official Receiver.

(1) [1955] 2 A.E.R. p.592.

(2) [1915] H.B.R. 98.

(1) [1955] 2 A.E.R. p.592 at p.600.

(3) [1895] 1 Q.B. 724.