Re Chang Hyun Chi

HCB 5227/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 5227 OF 2006

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D E C I S I O N

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Introduction

1.This is the bankrupt’s application.  In short, he seeks the following orders:

(a)  his bankruptcy has been “automatically” discharged after the lapse of 4 years since the date of bankruptcy order (20 December 2006) (“the said automatic discharge”);

(b)  s 30A(10)(a), Bankruptcy Ordinance (Cap 6) which purports to prevent the said automatic discharge by reason of the bankrupt’s absence from Hong Kong before the commencement of bankruptcy, is unconstitutional and has no effect;

(c)  s 29, Cap 6, which provides for the bankrupt’s examination on oath, is no longer applicable after the said automatic discharge.

2.This application is opposed by the bankrupt’s trustees in bankruptcy (“the Trustees”).  The Official Receiver agrees with the stance of the Trustees.

3.The above dispute will be dealt with under separate headings below.

Background

4.In an earlier legal action commenced in July 2003, the bankrupt was sued for damages for fraud, misrepresentation and breach of duty.  Default judgment was entered against him.

5.The judgment creditor petitioned for his bankruptcy on 3 July 2006 and he was adjudged bankrupt on 20 December 2006. The Trustees were appointed on 3 April 2007.

6.The bankrupt is a Korean national.  He:

(1)  was away from Hong Kong from August 2003 to 26 April 2006;

(2)  visited Hong Kong on transit for a few times between 26 April and 30 November 2006.

Further, the bankrupt was in Korea when the bankruptcy order was made.

7.The only information provided by the bankrupt to the Trustees was a statement of earnings and property acquired for the period from 20 December 2006 to 9 December 2007.  The Trustees have not been able to obtain the bankrupt’s cooperation or any substantial response from him in their administration of his bankruptcy.

The constitutionality of s 30A(10)(a), Cap 6

8.S 30A(10)(a) provides:

“Notwithstanding subsections (1) to (3), where a bankrupt-

… has, before the commencement of the bankruptcy, left Hong Kong and has not returned to Hong Kong, the relevant period under subsection (1) shall not commence to run until such time as he returns to Hong Kong and notifies the trustee of his return” (emphasis supplied).

Ss 30A(1) to (3) referred to in s 30A(10)(a) concern the length of periods for the automatic discharge from bankruptcy (and the length of any “extended” periods). The effect of s 30A(10)(a) is in gist to “suspend” the period for automatic discharge.

9.The heading of s 30A is “Discharge from bankruptcy”.  Apart from s 30A(10)(a), s 30A(10)(b)(i) and (ii) is also concerned with the “suspension” of the period for automatic discharge (where a bankrupt leaves Hong Kong without notice, or fails to return as the trustee specifies).

10.The Court of Final Appeal has decided (by a majority) in Official Receiver & Trustee in Bankruptcy of Chan Wing Hing and Another v Chan Wing Hing and Others (2006) 9 HKCFAR 545 that s 30A(10)(b)(i) is unconstitutional (in that it restricts the right to travel guaranteed by Art 31, Basic Law of Hong Kong (“Basic Law”) and Art 8(2), Hong Kong Bill of Rights (Cap 383)).

11.The majority’s reasons for their decision appear to be condensed in the following passages:

“44. Turning to the second stage of the proportionality test, the question is whether the restriction on the right to travel contained in s.30A(10)(b)(i) is no more than is necessary to protect primarily the rights of creditors.

45. As has been discussed, the purpose of the restriction is to ensure that the bankrupt stays on the trustee's radar so that the trustee can seek his co-operation when required. In considering whether the restriction is no more than is necessary, it is important to bear in mind that, … , there are weapons available to the trustee and the creditors when faced with the bankrupt’s failure to co-operate in the context of the scheme regulating discharge. …

46. … it is the need to notify together with the sanction for failure to notify which constitute the restriction on the right to travel. Once the sanction bites, the relevant period is suspended indefinitely until the bankrupt returns to Hong Kong and notifies the trustee of his return. … , it operates indiscriminately at all times and irrespective of the circumstances. Three points should be made in this regard.

47. First, the sanction operates irrespective of the reason for the bankrupt's failure to notify which triggers it. A wide variety of causes may account for the failure. At one end, the reason may be wholly innocent … At the other end, the reason may be wilful such as the bankrupt's deliberate and dishonest intent to evade his obligations under bankruptcy law. …

48. Secondly, the sanction applies indiscriminately to all situations. … irrespective of whether it has occasioned any prejudice to the administration of the estate and even where the bankrupt's co-operation is not required or where the administration of his estate has already been satisfactorily completed.

49. Thirdly, the sweeping application of the sanction means that there is no discretion vested in the court to disapply the sanction or to mitigate its consequences, … Nor could the trustee or the creditors assist the bankrupt in this regard, even where they wish and it is in their interests to do so.

50. Applying a generous approach to the interpretation of the right to travel, having regard to the harshness of the sanction, the restriction on the right cannot be regarded as no more than is necessary to protect primarily the rights of creditors. … Accordingly, s.30A(10)(b)(i) is unconstitutional and a declaration should be made accordingly.” (emphasis supplied)

12.On the other hand, a summary of the minority’s reasons for deciding otherwise is as follows:

“84. In my view, …, s 30A(10)(b)(i) constitutes a legitimate and proportionate limitation on the freedom. The only requirement which it imposes upon a bankrupt who wishes to exercise his freedom to travel is the requirement of notifying the trustee of his itinerary and contact details. ... That requirement is not onerous. ...

...

87. The mechanisms of notification serve the very purpose of ensuring that the sanction of suspending the running of time operates as a proportionate incentive to cooperation allowing the sanction to be wholly avoided or promptly mitigated. … They are mechanisms placed entirely in the bankrupt’s hands and simple to operate. There is no doubt that all bankrupts are told that their cooperation is required, including the requirement that they inform the Official Receiver of any intended absence from Hong Kong. ...

…

89. Non-compliance with the notification requirement does not prejudice any accrued right of the bankrupt to a discharge. He does not enjoy such a right and does not suffer such a consequence. ...” (emphasis supplied)

13.The Court of Final Appeal has expressly stated that no view was expressed on the constitutionality of s 30A(10)(a): the Chan Wing Hing case, para 52.

14.Whether s 30A(10)(a) is unconstitutional depends ultimately on whether:

(a)  the analysis set out in the Chan Wing Hing case can be adopted here;

(b)  (if so) the restriction on travel is more than is necessary to protect legitimate interests.

15.Briefly, I agreed with the Official Receiver (and the Trustees) that the analysis set out in the Chan Wing Hing case should be equally applicable here:

(1)  the restriction on travelling right is constituted by a bankrupt’s absence from Hong Kong (need to notify the trustee in the case of s 30A(10)(b)(i)) and the sanction which follows from the absence (failure to notify in the case of s 30A(10)(b)(i)): para 39 and 46 thereof;

(2)  there is a rational connection between this provision and the purpose of ensuring that bankrupts be available to assist the trustees so that the trustees can administer the estate effectively: para 41 thereof.

16.In relationship to the “proportionality test”, the factors tending against its constitutionality are (similar to s 30A(10)(b)(i)):

(1)  indiscriminant application irrespective of the reason for a bankrupt’s absence from Hong Kong;

(2)  indiscriminant application irrespective of the effect (if any) on the administration of a bankrupt’s estate;

(3)  lack of mechanism for disabling or lessening the effect of the provision.

17.The factor tending for its constitutionality is that it is highly probable a bankrupt’s absence from Hong Kong, which would effectively mean his cooperation would be unavailable, would render the administration of his estate difficult in most cases (albeit there may be estates which are extremely simple and/or easy to administer, so that a bankrupt’s total absence will not render such administration any less easy).

18.The Official Receiver’s stance (which is supported by the Trustees) is that s 30A(10)(a) does not fall foul of the proportionality test.  The following reasons are put forth in support of that stance.

19.First, this provision can only be invoked once, whereas s 30A(10)(b)(i) can be engaged (from time to time) as and when a bankrupt fails to comply with it during the whole period for automatic discharge.

20.Secondly, there is a major distinction between this provision and s 30A(10)(b)(i).  In the case of s 30A(10)(a), the adverse effect of a bankrupt’s absence from Hong Kong before the commencement of bankruptcy on the administration work relating to his estate would have been much more profound.  On the other hand, the bankrupt’s absence under s 30A(10)(b)(i) may take place at the less critical stage(s).

21.Thirdly, the Official Receiver’s empirical data also justify the enactment of s 30A(10)(a):

(a)  of the bankrupts who were caught by this provision, almost 90% have not returned to Hong Kong after they left before the commencement of bankruptcy (as at 14 June 2011, 1,807 out of 2,085 bankrupts (or 87%) did so);

(b)  hence, if this provision had not been enacted, these “absent bankrupts” would have their bankruptcy discharged despite not having performed their duties as bankrupts (for example, s 30A(4)) (as at the date of the hearing, 1,885 out of 2,133 bankrupts (or 88%)).

22.In concluding in favour of the above arguments of the Official Receiver (and the Trustees), I have taken into account:

(1)  the more limited application of s 30A(10)(a) (compared to s 30A(10)(b)) (para 19 above) and the relative ease of means by which a bankrupt can comply with the provision;

(2)  the likely practical effect of a bankrupt’s absence before the commencement of bankruptcy on the administration of his estate (balanced against the likely small number of bankruptcies which do not require his presence) (para 20 above);

(3)  the likely practical effect on the bankrupts who may be affected by s 30A(10)(a) arising from the empirical data provided by the Official Receiver (para 21 above).

23.Accordingly, I did (and do) not consider s 30A(10)(a) to have contravened the provisions of the Basic Law, or Cap 383.

The application of s 29, Cap 6 post-automatic discharge

24.S 29, Cap 6 stipulates:

“(1) The court may, on the application of the Official Receiver or trustee, at any time after a bankruptcy order has been made against a bankrupt summon before it the bankrupt … and the court may require any such person to produce any documents in his custody or power relating to the bankrupt, his dealings or property.

…

(3) The court may, by itself or by a commissioner appointed for the purpose, examine on oath, either by word of mouth or by written interrogatories, any person so brought before it concerning the bankrupt, his dealings or property and any other matter the court considers relevant.

(3A) It shall be the duty of a person examined under subsection (3) to answer all questions that the court may put or allow to be put to him” (emphasis supplied).

25.Further, s 30A(8) reads:

“Where a bankrupt has been discharged, he shall, notwithstanding his discharge-

(a) continue to give such information respecting his affairs; and

(b) attend on the trustee at such times, and do such other things,

as the trustee requires for the purpose of completing the administration of the estate, and if a discharged bankrupt does not comply with the requirements of this subsection, he shall be guilty of a contempt of court and may be punished accordingly on the application of the trustee” (emphasis supplied).

The wording of s 30A(8), Cap 6 is similar to s 26(9), Bankruptcy Act 1914.

26.The Trustees rely on the following authorities in support:

(a)  Re Coulson [1934] Ch 45;

(b)  Oakes v Simms [1997] BPIR 499.

27.The trustee in the Coulson decision applied for an order of examination after the bankrupt’s discharge from bankruptcy.  Referring to s 26(9), 1914 Act, the English court of appeal decided that the trustee could summon a bankrupt to be examined pursuant to s 25, 1914 Act despite his earlier discharge from bankruptcy.  The judgment said:

“Now the powers that are given by s. 25 are not limited to any time or to the duration of the bankruptcy from which the debtor obtained his discharge, and it will be observed that by s. 26, sub-s. 9, an indication is given that the powers of s. 25 remain in being.” (p 48).

28.In the Oakes decision, the trustee made an application for the bankrupt to attend private examination.  The English court of appeal held that such a power (conferred by s 366, Insolvency Act 1986) is unlimited and can be exercised notwithstanding the discharge from bankruptcy.  The judgment referred to the Coulson decision as authority for the ambit of the power.

29.I agreed with the Trustees.  I considered the above reasons given in the Coulson decision and the Oakes decision to equally apply here.  There is no valid reason to curtail the ambit of s 29, Cap 6.

Conclusion

30.This application is dismissed.

Other matters

31.The bankrupt applied for legal aid on 21 March 2013 (about 4 weeks (or about 16 working days) before the hearing).  By virtue of s 15(4), Legal Aid Ordinance (Cap 91) (read with r 7A, Legal Aid Regulations (Cap 91A)), this application was stayed at the time of hearing.  The bankrupt also sought an adjournment of the hearing to enable the Director of Legal Aid to process his said application.

32.Both the Trustees and the Official Receiver sought the uplift of the stay of proceedings and opposed the application for adjournment on the ground that there was no valid reason why the bankrupt should act only at such a late stage.

33.This application was taken out in July 2012 (some 9 months before the hearing).  The bankrupt was legally represented until 25 March 2013.  He claimed that he was no longer financially able to engage lawyers and was made aware of legal aid only recently.

34.I agreed that the bankrupt had not been able to put forth convincing reasons.  He has been a sophisticated investor with an international experience.  He appears to be highly educated and speaks fluent English with articulation.

35.Accordingly, the legal aid stay was uplifted (for the record, the Director refused the application after the hearing (on 24 April 2013)), and the application for adjournment was refused.

36.The parties’ closing submissions also mentioned various other points.  These have not been expressly set out or dealt with in the above headings and sub-headings.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs order

37.The parties agreed the usual rule that costs should follow the event should apply.  There will accordingly be a costs order that the costs of this application be paid by the bankrupt to the Trustees and the Official Receiver.

38.I consider summary assessment of costs to be appropriate.  The above costs shall thus be so assessed.  For this purpose:

(1)  the receiving parties be at liberty to lodge with court and serve respective statements of costs within 7 days from today;

(2)  the paying party be at liberty to lodge with court and serve statements of objections within 7 days thereafter.

The bankrupt appeared in person

Ms Pauline Leung, instructed by Chow, Griffiths & Chan, for the Joint and Several Trustees in Bankruptcy of the bankrupt

Ms Linda Chan SC, instructed by the Department of Justice, for the Official Receiver 

Please refer to CACV110/2013 for the relevant appeal(s) to the Court of Appeal.