Fred Lee and Chow Wai Lan Christine Trustees of the Property of Lam Chun Cheung, A Bankrupt v. Lam Chun Cheung

HCB 10735/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 10735 OF 2009

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BETWEEN

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D E C I S I O N

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THIS APPLICATION

1.This is an application on the part of the joint and several trustees (“the Trustees”) of the property of Lam Chun Cheung by way of summons filed on 7 August 2013 for an order that the relevant period under section 30A of the Bankruptcy Ordinance for the discharge of the Bankrupt shall cease to run for a period as the Court sees fit.

2.The Trustees relied on the following grounds set out in section 30A(4)(c) and (d) of the Bankruptcy Ordinance, namely, that:

(1)   the Bankrupt has failed to cooperate in the administration of his estate; and

(2)   the conduct of the Bankrupt, in respect of the period before and after the commencement of the bankruptcy, has been unsatisfactory.

RELEVANT BACKGROUND

3.The Bankrupt petitioned for his own bankruptcy on 5 August 2009.

4.For the purpose of the Petition filed herein, the Bankrupt disclosed in List H of his Statement of Affairs that he had sold his property situated in Lai Chi Kok Road (“the Property”) in late 2008 at $3,110,000 and as a result of which he had received payments of deposit in the total sum of $311,000 in October 2008 and net balance of the price in the sum of $1,034,087.11 on 20 November 2008 (having deducted certain mortgage loan repayments and conveyancing costs).  In other words, the Bankrupt had received a total of $1,345,087.11 (“the Sale Proceeds”).

5.The court then raised a requisition and the Bankrupt was asked to explain where the Sale proceeds had gone.

6.To reply to the court’s requisition, the Bankrupt filed an affirmation on 9 September 2009 (“the Bankrupt’s Affirmation on Sale Proceeds”).  He explained that the Sale Proceeds had been spent on various domestic needs. Further, such proceeds have been used to repay the following creditors:

Phan Kim Chong (“Phan”)	$136,000
Cheung Siu Cheung (“Cheung”)	$80,000
Hang Seng Bank (overdraft)	$21,008
Citibank (personal loan)	$111,200
Standard Chartered Bank (credit card)	$77,441

7.On top of the above, part of the Sale Proceeds has also been used to repay debts owed by the Bankrupt’s wife (who was a housewife) to:

Heng Sang Bank (credit card)	$171,224
Standard Chartered Bank (personal loan)	$98,428
Manhattan Card Limited (credit card)	$63,839
Aeon (credit card)	$19,936
DBS Bank (credit card)	$67,739

8.In relation to the repayments made to the banks, the Bankrupt had exhibited a large number of bank statements and tables by which he had set out clearly how the various sub-totals were arrived at.

9.In the said Affirmation, the Bankrupt also provided the address and mobile phone number of Phan and Cheung respectively.

GROUNDS OF OBJECTION

10.In the affirmation in support of this application, the Trustees alleged that the Bankrupt’s conduct was unsatisfactory and that he was uncooperative. A number of allegations had been made therein.  In the Trustees’ affirmation in reply and in their skeleton submission, some other allegations were also relied on.

11.At the beginning of the hearing, I asked Mr Yiu (the Trustees’ solicitor) as to whether the Trustees should be allowed to rely on matters which were only raised for the first time in the affirmation in reply or in his written submissions.  Having taken instructions, Mr Yiu informed this court that he would only rely on the following grounds which were covered by the Trustees’ affirmation in support:

(1)   The Bankrupt repaid the debts of his wife in full in the total sum of $421,166 while leaving his own creditors partly unpaid;

(2)   The Bankrupt chose to repay Pham and Cheung, his brothers-in-law, in the total sum of $216,000 and this amounts to unfair preference; and

(3)   The Bankrupt failed to assist the Trustees in locating Pham and Cheung so as to facilitate the Trustees’ proposed actions against them.

12.I will consider these grounds in turn below.

THE APPLICABLE APPROACH

13.However, before I turn to those grounds, I should refer to the applicable legal principles first.

14.In this regard, Mr Yiu for the Trustees has referred me to the case of Fred Lee v Tong Yuk Lin (HCB 22870/2002, unreported, 20 June 2007).  The applicable approach as explained by To J may be summarised as follows:

(1)   In considering an objection to automatic discharge, the proper approach is to consider whether the conduct complained of is unsatisfactory within the meaning of section 30A(4) and, if it is, whether the court should exercise its discretion under section 30A(3) to suspend the running of the relevant period. (at paragraph 11)

(2)   The word “conduct” must be given its ordinary and common sense meaning which in the context of bankruptcy must mean any conduct which is relevant or contributed to the bankrupt’s insolvency.  For the conduct to be caught under section 30A(4)(d), the conduct must be unsatisfactory.  What is unsatisfactory depends on all the circumstances.  It is impossible to be specific as to what conduct would be unsatisfactory. (at paragraph 12)

(3)   The facts listed in section 30(4) of the old Bankruptcy Ordinance are examples of the type of pre-bankruptcy conduct which could be regarded as unsatisfactory under the new regime.  In general, the conduct complained of must be some positive conduct related or contributed to the bankruptcy. (at paragraph 14)

(4)   Ultimately, the question of whether the conduct is unsatisfactory is whether the conduct is one which the society is prepared to condone without expressing disapproval.  This question is to be answered by the reasonable man’s test.  This hypothetical reasonable man has to bear in mind the overriding purpose of rehabilitation. (at paragraph 17)

(5)   The reasonable man has to take into account human nature, its weakness, its readiness to indulge in extravagant spending and its readiness to engage in speculation and assumption of risk.  In the end, this is a question of fact for the reasonable member of the society. (at paragraph 17)

(6)   In the exercise of its discretion under section 30A(3), the court should take a balanced view.  It should balance the interest of the bankrupt, the interest of his creditors, the public interest in the bankrupt’s rehabilitation and the demands of commercial morality underpinning the bankruptcy laws.  It should take into consideration all the circumstances leading to the bankruptcy and not just the conduct complained of.  It should consider the seriousness of the conduct, the bankrupt’s conduct after the commencement of bankruptcy, the degree of co-operation he has shown with the trustee during the relevant period and the effort he has contributed to repaying his debt.  In an appropriate case, the court should consider the risk to the commercial community should the bankrupt be allowed to resume full commercial activity.  The discretion to suspend the running of the relevant period should not be lightly exercised.  But in its balancing exercise, the court should not allow the bankruptcy regime to be abused. (at paragraph 21)

(7)   As for the period of suspension, the court should bear in mind the overriding policy of the law is rehabilitation.  Any period of suspension should be minimal to enable the bankrupt to return to his normal life as soon as possible.  The purpose of suspension is also rehabilitative and solely to mark society’s disapproval of the type of unsatisfactory conduct but no more.  It is not to be used as a means of extracting more contribution from the bankrupt for distribution to his creditors.  The court should not be unduly concerned about the amount of the debt.  The period of suspension should reflect the seriousness of the conduct which the court has found to be unsatisfactory.  The court should also take into account the personal circumstances of the bankrupt, such as his age and family needs. (at paragraph 22)

DISCUSSION ON THE GROUNDS OF OBJECTION

Repayment of wife’s creditors

15.The Trustees’ first complaint is that the Bankrupt has repaid his wife’s creditors in full (in the total sum of $421,166) while leaving his own debts partly unpaid.

16.In this regard, the Bankrupt explained that:

(1)   His wife was a housewife at the material time;

(2)   In order to pay off family expenses, his wife had borrowed a bank loan and incurred credit cards debts;

(3)   Upon receipt of the Sale Proceeds, the Bankrupt repaid all debts under his and his wife’s name respectively to various banks (except two loans owed to Citibank and Standard Chartered Bank respectively) in the total sum of $223,489.98 in around December 2008;

(4)   He did not pay off the loans owed to Citibank and Standard Chartered Bank because by doing so he would have to pay penalty for early repayment;

(5)   He had kept the balance of the Sale Proceeds for payment towards family expenses to be incurred and for paying monthly instalments to Citibank and Standard Chartered Bank;

(6)   His plan was that if he could find a job, he would be able to make ends meet and at the same time repay the remaining debts to Citibank and Standard Chartered Bank on a monthly basis;

(7)   At the time when he repaid the various bank debts, he did not anticipate that he would have to petition for his own bankruptcy;

(8)   Unfortunately, because of the economic crisis, he was unable to find any job.  As a result, he could only rely on the balance of the Sale Proceeds to pay off his family expenses.  New debts were also incurred;

(9)   When the balance of the Sale Proceeds was completely used up, he had no choice but to petition for his own bankruptcy in August 2009.

17.As shown by various bank statements placed before the court, the total sum of $421,166 (the subject matter of the first complaint) was paid over a period of around 8 months.  It is therefore inappropriate to approach the matter as if the Bankrupt had paid the said sum at one go.

18.In my view, the payments towards the debts owed by the Bankrupt’s wife should be analysed by dividing them into three batches, which I will now do.

The first batch of payments

19.The first batch of payments involves those which were made in around December 2008 in the total sum of $223,489.98.

20.It is undisputed that upon the Bankrupt’s receipt of the Sale Proceeds in October and November 2008, he had applied part of the same for repayment of nearly all debts owed to the banks whether those debts were incurred under his or his wife’s name.

21.The only debts which the Bankrupt did not repay in full at the time were a loan owed to Citibank (under his name), another loan owed to Standard Chartered Bank (under his wife’s name) and two other debts which were owed to Phan and Cheung respectively.  I shall discuss further on the debts owed to the two individual creditors under the next ground of objection.

22.Out of the aforesaid unpaid loans owed to the banks, the Trustees’ focus was on the Citibank loan because it was borrowed under the Bankrupt’s name. This is not a credit card debt.  This is a loan of $480,000 extended by Citibank which was approved for the purpose of allowing the Bankrupt to repay some other loans owed to that bank and some other banks.  The interest rate was fixed (at the annualize percentage at 15%) and the agreement was that the entire loan would be repaid by 60 equal monthly installments of $11,120.

23.As aforesaid, the Bankrupt explained that he did not settle this loan in full forthwith because he did not want to pay penalty which would be imposed by the bank upon early repayment.

24.Mr Yiu for the Trustees did not accept the Bankrupt’s explanation.  He submitted that according to the drawdown letter of Citibank, the penalty was 5% in the first year which would be equivalent to no more than $24,000.  He stated that the reason offered by the Bankrupt was not credible at all because the Bankrupt, with the Sale Proceeds, should have the financial ability to pay such penalty.  Mr Yiu suggested that the Bankrupt should have paid off the Citibank loan entirely upon his receipt of the Sale Proceeds.  It appears Mr Yiu was arguing that the Bankrupt was not interested in repaying his own debts.

25.I do not accept that this is a fair criticism of the Bankrupt’s conduct.

26.In my view, when assessing the reasonableness of a bankrupt’s conduct, the trustees have to bear in mind the surrounding circumstances at the material time.  It is always easy, with the benefit of hindsight, to say that the bankrupt should or should not have acted in a certain way.  However, the problem is that the bankrupt did not have that benefit at the material time. He did not have a crystal ball to tell him what would happen next.  If the trustees lose sight of these constraints, the standard which the bankrupt is expected to have achieved would be higher than reasonable.

27.In this case, it cannot be disputed that the Property was the last valuable asset which the Bankrupt had at the time.  The sale of the same was his last hope to turn matters around.  Any reasonable person in the Bankrupt’s position would have used every cent out of the Sale Proceeds very carefully.  I do not agree with Mr Yiu that the Bankrupt should have repaid Citibank in full despite the penalty of $24,000, which is not a small amount.  Indeed, it was more than two monthly instalments payable to Citibank.

28.Furthermore, the bank statements and documents which the Bankrupt produced show that the annualized percentage rate of this loan was around 15% which was much less than the interest rate applicable to at least some of the credit card debts which could be found in some of the bank statements placed before this court.  Hence, there was no urgency for the Bankrupt to repay this entire loan there and then.

29.To the contrary, if the Bankrupt had repaid the Citibank loan in full, his savings would be greatly reduced.  If he could not get a job within a short time, the possibility is that he would incur new credit cards debts which he could not repay much earlier, and these would only accumulate at a speed that the Bankrupt could not cope.  The Citibank loan, in my view, had given the Bankrupt some breathing space which was much needed by him at the time.

30.As far as the debt owed to Standard Chartered Bank was concerned, while it was not the focus of the Trustees, it should also be noted that it was a loan which was also repayable by equal monthly instalments (of $3,628.22).  The annualized interest rate was around 11%.  The function of this loan was exactly the same as the Citibank loan, namely, to give the Bankrupt some breathing space.  It was thus reasonable for the Bankrupt not to repay this loan in full there and then upon his receipt of the Sale Proceeds.

31.After the first batch of payments was made, the Bankrupt and his wife were clear of credit card debts.  The Bankrupt was only facing a fixed monthly instalment for bank loans of around $15,000 in total.  There is no evidence before this court as to how much the monthly family expenses were except that the total of the school fees for the Bankrupt’s children and the salary payable to a domestic helper was around $11,700.  In my view, it was reasonable for the Bankrupt to consider in around late 2008 that he would be able to resolve his financial difficulty completely.  I accept that by the end of 2008, the Bankrupt did not anticipate that he would have to petition for his own bankruptcy, and it was entirely reasonable for the Bankrupt to do what he did, in particular, keeping more cash for future use.

32.In addition, it is the Bankrupt’s evidence that he regarded the wife’s debts owed to the banks as “the family’s debts”, since the money borrowed was spent on family expenses.  She was a housewife at all material time and had to rely on the Bankrupt to repay those debts.  Having been a full-time mother since around 2003 or 2004, she only came out to work again in 2007 (for around a year before she lost her job) when the Bankrupt found that he was unable to repay all the debts by himself.  The Trustees have not applied to cross-examine the Bankrupt and there is nothing which suggests that the Bankrupt was not telling the truth.  In the particular circumstances of the present case, I accept that it was reasonable for the Bankrupt to treat the debts owed under the name of his wife as his own debts.  This is another reason why I find that the Bankrupt’s conduct in repaying his wife’s creditors was not unsatisfactory.

The second batch of payments

33.Having repaid most of the debts owed to various banks by the first batch of payments, the Bankrupt kept the balance of the Sale Proceeds which could be used to pay off family expenses.  According to the Bankrupt, his wife normally used credit cards to pay for such expenses first, and he would then give his wife money to pay off her credit cards debts.

34.As the Bankrupt put it, he was expecting a new life upon the sale of the Property because the old credit cards debts had been cleared.  Indeed, it can be seen that in early 2009, the Bankrupt was able to make full payments of all the new credit cards debts incurred by himself and his wife every month.  The Bankrupt could also pay the monthly instalments to Citibank and Standard Chartered Bank referred to above on time.  By the “second batch of payments”, I am referring to those payments made by the Bankrupt towards his wife’s creditors during this period of time.

35.In my view, when the Bankrupt was making full payments towards all credit cards debts no matter whether they were incurred under his name or the name of his wife, no valid complaint can be made against him.  I accept that by then it was still realistic for the Bankrupt to think that there might be a feasible way out and he would not have to petition for his own bankruptcy, so long as he could find a job sooner rather than later.

36.In any event, as aforesaid, I accept that it was reasonable for the Bankrupt to treat the debts owed by his wife to the banks as his own debts in the particular circumstances of the present case.

37.Hence, it is my finding that the Bankrupt’s conduct in repaying his wife’s debts by the second batch of payments was not unsatisfactory.

The third batch of payments

38.What the Bankrupt did not expect was that he was unable to secure any job, not even that of a low position, in 2009.  As a result, the Sale Proceeds were eventually used up in around mid-2009.  The Bankrupt then petitioned for his own bankruptcy on 5 August 2009.

39.It can be seen that since around late May 2009, the Bankrupt has become unable to make full payment to his and his wife’s creditors again.

40.From late May 2009 until July 2009, the Bankrupt had paid a total of $117,307.76 to various banks so as to partially settle the debts owed by him and his wife.  Out of the said sum, only $27,512.76 (around 23.5%) was paid to settle his own debts and the rest was paid to his wife’s creditors.  The date on which some of these payments were made was 29 July 2009.  As a result, it appears that his wife no longer owed any debts by the time when the Bankrupt presented the Petition herein on 5 August 2009.

41.Mr Yiu submitted that it was clearly the intention of the Bankrupt to fully repay his wife’s creditors instead of his own so that his wife would not have to declare bankrupt.  When Mr Yiu made this submission, he was referring to the whole payment of $421,166.  I do not think this submission is entirely correct because, as explained above, the Bankrupt was not having bankruptcy in mind when he made the first and second batches of payments.  However, in respect of the third batch of payments, I am of the view that Mr Yiu’s submission is correct.  Indeed, the Bankrupt has not argued otherwise.

42.However, as pointed out in the analysis under “the first batch of payments”, the Bankrupt all along regarded his wife’s creditors as his own because his wife’s debts had been incurred for the purpose of paying off the Bankrupt’s family expenses.  His wife was a housewife and she could only look to the Bankrupt for financial support.  Under these particular circumstances, I do not think a reasonable member of the society would consider the Bankrupt’s conduct unsatisfactory.

43.The position would of course be different if there is evidence showing that the debts of the Bankrupt’s wife were incurred by her for her own purpose.  In such a case, a bankrupt husband’s intention of protecting his wife from bankruptcy would not be accepted as something which the society would condone without expressing disapproval.  However, there is no such evidence in this case.

44.The first ground of objection should therefore be rejected.

Repayments to brothers-in-law

45.The Bankrupt stated that, upon receipt of the Sale Proceeds, he had repaid Phan and Cheung for $136,000 and $80,000 respectively.  The Trustees complain that these payments amount to unfair preference.

46.As these payments were made within 2 years before the Petition herein was presented, the Trustees rely on section 50(5) of the Bankruptcy Ordinance and submit that it is presumed that the Bankrupt, when making the payments, had been influenced by his desire to put Phan and Cheung into a position which would be better than the position they would have been in in the event of his own bankruptcy if such payments had not been made.

47.This presumption is rebuttable.  The question here is whether the Bankrupt herein has successfully rebutted it.

48.As I pointed out, by the time when the first and second batches of payments were made, it was reasonable for the Bankrupt to take the view that he would be able to resolve his financial difficulty at the end of the day.  If his plan could be materialised, he would not have to petition for his own bankruptcy.  There was no “preference” as such in his mind at that time, since all the creditors would be paid in full eventually.

49.Moreover, it is noted that according to List B of the Statement of Affairs which the Bankrupt filed together with his Petition, the total debts which the Bankrupt owed to Phan and Cheung were $300,000 and $160,000 respectively.  In other words, the Bankrupt did not repay his relatives in full when he was capable to do so financially.  According to the Bankrupt’s evidence (which I accept), he did not do so since he wanted to keep more money so that he could make use of the same to repay the banks in case he could not find a job.  If the Bankrupt was minded to give his relatives any unfair preference, he would have settled the whole debts owed to them with the Sale Proceeds. What the Bankrupt did simply does not sit well with any intention of preferring his relatives.

50.Taking these matters into account, I am of the view that the Bankrupt has successfully rebutted the aforesaid presumption.

51.I therefore do not accept the second ground of objection.

Bankrupt’s failure to assist in locating his brothers-in-law

52.The Trustees, under their third ground of objection, complain that the Bankrupt had failed to assist them in locating Phan and Cheung.  The Trustees wanted to locate Phan and Cheung for the sake of recovering the money repaid to them.

53.In the Bankrupt’s Affirmation on Sale Proceeds, the Bankrupt had provided the addresses and mobile phone numbers of Phan and Cheung respectively.

54.However, when the Trustees tried to contact Phan and Cheung by the contact particulars as provided by the Bankrupt, it was found that those particulars were no longer up-to-date.

55.The Trustees therefore requested the Bankrupt to assist in locating them.  The Bankrupt agreed to do so, but in the end, no further particulars were provided by the Bankrupt.

56.The Trustees therefore considered that the Bankrupt was not cooperative.

57.In his affirmation in opposition, the Bankrupt explained that he had tried to find out the contact particulars of Phan and Cheung, but the problem is that both of them, having found out that the Bankrupt had chosen to pay the banks in full but leaving them partially unpaid, were so angry with him that they had cut link with him totally.  Having learnt about the bankruptcy order herein, they even asked all the relatives not to disclose their whereabouts to the Bankrupt.

58.Mr Yiu submitted that since Phan and Cheung were close relatives of the Bankrupt, it is incredible that the Bankrupt would not have any means to contact Phan and Cheung.

59.With respect, I do not accept Mr Yiu’s submission in this regard.  Firstly, I note that it was the Bankrupt who had taken the initiative to disclose the addresses and phone numbers of Phan and Cheung in the Affirmation on Sale Proceeds.  He was not asked by the court to do so.  If he was minded to conceal their whereabouts, he would not have included such information in his said affirmation.  Secondly, according to the Bankrupt’s uncontradicted evidence, both Phan and Cheung were unemployed when he received the Sale Proceeds.  They therefore chased him for repayment of the debts, knowing that he should have the ability to do so with the Sale Proceeds.  However, he only repaid half of their respective debts.  It is understandable, and thus credible, that Phan and Cheung refused to contact the Bankrupt again upon knowing that there was no chance for them to recover their debts.  Thirdly, there is nothing which shows that the Bankrupt did not assist the Trustees at all as alleged.  It is true that at the end of the day the Bankrupt could not provide any further useful information to the Trustees, but that does not mean that the Bankrupt had not tried to do anything.  The Bankrupt’s evidence, which remains uncontradicted, is that he had tried to contact Phan and Cheung but in vain, and that he could not elicit further information from his relatives.

60.In these circumstances, I do not find that the Bankrupt was in any way uncooperative as alleged by the Trustees.

61.The third ground of objection is therefore rejected.

CONCLUSION

62.By reasons of the aforesaid, the Trustees’ application is dismissed.

63.It follows that the bankruptcy order made on 15 September 2009 and the interim order made against the Bankrupt on 13 September 2013 which was continued on 24 February 2014 should be discharged.

64.As the Bankrupt has indicated at the end of the hearing that he would not ask for costs in case this application is dismissed, I make no order as to the costs of this application.

Mr C Yiu, of Yaddy Cheung & Co, for the trustees

Mr Lam Chun Cheung, the Bankrupt, appeared in person