Re Cheung Chan Hong

HCB 4827/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4827 OF 2007

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J U D G M E N T

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Introduction

1.This is an application by the joint & several trustees in bankruptcy (“Trustees”) of the estate of Mr Cheung Chan Hong (“bankrupt”) for inter alia :

(1)   a declaration that the bankrupt of the first part and the Respondent Madam Chow Lau Kwai (“Madam Chow”) of the second part hold the property known as Flat 03, 30/F, Hong Ming House (Block 3), Wah Ming Estate, No.21 Wah Ming Road, Fanling, New Territories (“Property”) as tenants in common in equal shares;

(2)   an Order that the Property be sold as soon as practicable pursuant to section 6 of the Partition Ordinance, Cap 352 (“PO”) and RHC Order 31; and

(3)   delivery up of vacant possession of the Property to the Trustees.

2.The application is opposed by Madam Chow, the wife of the bankrupt and a joint registered owner of the Property.

Background

3.The bankrupt is 71 years old while Madam Chow is 63.

4.On 1 June 2007, the bankrupt presented a petition for his own bankruptcy under section 10 of the Bankruptcy Ordinance, Cap. 6 (“BO”). On 17 July 2007, a Bankruptcy Order was granted by this court against the bankrupt.

5.The bankrupt has three unsecured creditors viz Hang Seng Bank, HSBC and BOC Credit Card (International) Limited. His total indebtedness, as accepted by the Trustees on 27 July 2012, was HK$281,493.43. According to the Trustees, up to the date of the present application, the bankrupt has not made any contribution to his bankruptcy estate account.

6.According to the Statement of Affairs filed with the petition, the bankrupt’s assets consisted of his share in the Property and credit balance of around HK$50,000 in three separate Mandatory Provident Funds accounts. The bankrupt was unemployed while his recurrent monthly expenditure including inter alia meals, traveling, utilities, management fees etc. was around HK$9,200. He had two dependents ie his mother and Madam Chow.

7.The Property is part of a Public Rental Housing/Tenant Purchase Scheme Estate managed by the Hong Kong Housing Authority. The bankrupt and Madam Chow purchased the Property for around HK$200,000 in September 1999 and registered it in their joint names. Its gross and saleable floor areas are 736 sq ft and 566 sq ft respectively. The Property is unencumbered by any legal charge.

8.Since the Property is covered by the Tenant Purchase Scheme, its owners must pay a premium to the Hong Kong Housing Authority before it can be sold in the open market; otherwise, it has to be sold in the Home Ownership Scheme secondary market. According to a valuation report dated 27 March 2014, the current market value of the Property with vacant possession was HK$3.1 million, assuming premium has been paid to the Hong Kong Housing Authority to remove the restrictions on alienation. The Home Ownership Scheme secondary market value of the Property was HK$2 million.

9.The bankrupt and Madam Chow have been living in the Property since at least its purchase in 1999. Indeed, as the Property is covered by the Tenant Purchase Scheme, one can safely assume that they have been living in the Property prior to 1999 as tenants. Presently, the bankrupt, Madam Chow and one of their sons viz Cheung Wing Wah reside in the Property. The bankrupt says he is now living on the monthly Old Age Allowance from the Social Welfare Department and income, roughly HK$2,000 – HK$3,000 a month, from part-time odd jobs such as relief worker for a dim sum chef. Madam Chow is unemployed and depends on the bankrupt and her son Cheung Wing Wah to support her living expenses. Both the bankrupt and Madam Chow suffer from various chronic medical conditions including diabetes, hypertension and high cholesterol and require regular medical attention.

The Law

10.Upon the making of a bankruptcy order and the appointment of a trustee in bankruptcy, a bankrupt’s interest in his property is vested in the trustee by operation of law: section 58(2) BO.

11.Further, upon the making of a bankruptcy order, any property of the bankrupt held in joint tenancy is severed automatically and the severance creates a tenancy-in-common as between the trustee on the one hand and the other co-owner(s) on the other: Re Dennis [1993] Ch 72, 74 (per Sir Donald Nicholls V.-C at he then was). However,as between the other co-owners, the joint tenancy continues: Halsbury’s Laws of Hong Kong 2^nd Ed. (2013) Vol. 35 “Land” para. 230.810:

“The unity of title is destroyed when one joint tenant assigns or mortgages his share to a third person…If there are only two joint tenants, this creates a tenancy in common in equity between the assignee and the other joint tenant; if there are more than two, it creates a tenancy in common in equity between the assignee and the other joint tenants; although, as between the other joint tenants, the joint tenancy continues. The effect is the same where one joint tenant becomes bankrupt.”

12.Section 6 PO provides that:

“(1) In any proceedings under this Ordinance, where it appears to the Court that a partition of the property would not be beneficial to all the persons interested by reason of-

(a) the nature of the land to which the proceedings relate;

(b) the number of the persons interested or presumptively interested;

(c) the absence or disability of some of the persons interested; or

(d) any other circumstances,

the Court may make an order for the sale of the property.

(2)   The Court may exercise its powers under subsection (1), notwithstanding the dissent or disability of any person interested.”

13.In Wong Chun Kei v Poon Vai Ching [2007] 1 HKLRD 825, Recorder Joseph Fok SC (as he then was) held that in proceedings under the PO, where it is impracticable to make an order for partition, the court should make an order for sale unless it is persuaded, the burden being on the opposing co-owner, that such an order will not be beneficial to all the co‑owners or that it will result in very great hardship to one co‑owner. Hardship, for the present purpose, includes pecuniary as well as practical detriment. Whether an order for sale is or is not beneficial to all the co‑owners is to be determined by the court objectively.

14.In the context of an application by a trustee in bankruptcy for the sale of a family home jointly owned by a bankrupt and his spouse in order to reduce the bankrupt’s debts, this court has been referred to three authorities.

15.First, in Re Citro (A Bankrupt) [1991] Ch 142, Nourse LJ said this at 157:

“The broad effect of these authorities can be summarized as follows. Where a spouse who has a beneficial interest in the matrimonial home has become bankrupt under debts which cannot be paid without the realisation of that interest, the voice of the creditors will usually prevail over the voice of the other spouse and a sale of the property ordered within a short period. The voice of the other spouse will only prevail in exceptional circumstances. No distinction is to be made between a case where the property is still being enjoyed as the matrimonial home and one where it is not.

What then are exceptional circumstances? As the cases show, it is not uncommon for a wife with young children to be faced with eviction in circumstances where the realization of her beneficial interest will not produce enough to buy a comparable home in the same neighborhood, or indeed elsewhere; and, if she has to move elsewhere, there may be problems over schooling and so forth. Such circumstances, while engendering a natural sympathy in all who hear of them, cannot be described as exceptional. They are the melancholy consequences of debt and improvidence with which every civilized society has been familiar. It was only in Re Holliday [1981] Ch 405 that they helped the wife’s voice to prevail; and then only, as I believe, because of one special feature of that case. One of the reasons for the decision given by Sir David Cairns was that it was highly unlikely that postponement of payment of the debts would cause any great hardship to any of the creditors…” (emphasis added)

16.Second, in Re Bremner [1999] BPIR 185, both the bankrupt, Mr. Bremner, and his wife were of advanced age. In addition, Mr. Bremner was terminally ill while his wife who cared for him at the family home was also of poor health. Jonathan Sumption QC, sitting as a deputy judge of the High Court (as he then was), approved an arrangement under which the sale of the family home was postponed until three months after the death of Mr. Bremner.  

17.At 186G-187B, the learned Judge first set out the relevant parts of section 336 of the Insolvency Act 1986:

“Under s.336(2) of the Insolvency Act 1986 Mrs Bremner's right as his wife to occupy the matrimonial home survives her husband's bankruptcy subject to the court's power on an application under s.33 of the Family Law Act 1996 to terminate it. Section 336(4) and (5) provide as follows:

‘(4) On such an application as is mentioned in subsection (2) - and I interpose that that refers to an application under the Family Law Act – the court shall make such order under section [33] of the Act of [1996]….as it thinks just and reasonable having regard to:

(a) the interests of the bankrupt's creditors,

(b) the conduct of the spouse or former spouse, so far as contributing to the bankruptcy,

(c) the needs and financial resources of the spouse or former spouse,

(d) the needs of any children, and

(e) all the circumstances of the case other than the needs of the bankrupt.

(5) Where such an application is made after the end of the period of one year beginning with the first vesting under Ch IV of this Part of the bankrupt's estate in a trustee, the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt's creditors outweigh all other considerations.’ ” (emphasis added)

18.At 187H-188B, the learned Judge continued:

“It follows, since the trustee’s application is made more than a year after the first vesting, that I must now determine: (1) whether the needs of Mrs Bremner amount to exceptional circumstances within subs (5), and (2) if they do, whether they outweigh the interests of creditors to an extent sufficient to justify an order delaying the sale. In my judgment, the circumstances are exceptional. The test is whether the problems which would result from an eviction are within the broad range of problems, necessarily distressing, which can be expected to arise from the process of bankruptcy and the resultant realisation of the bankrupt’s assets, or whether they lie wholly outside that range. I regard the age of Mr and Mrs Bremner and the terminal illness of Mr Bremner as circumstances lying outside the ordinary range of problems associated with a bankruptcy.” (emphasis added)

19.Lastly, in Re Leung Wang Fai unrep., HCB15328 of 2003, Mimmie Chan J, 17 March 2014, the learned Judge laid down the principle at [27] that the court should make an order for sale unless it is persuaded, the burden being on the opposing co-owner, that such an order would not be beneficial to all the co-owners or that it would result in very great hardship to one co-owner. On the facts of the case, the learned Judge, after balancing the interests of the trustees in bankruptcy and the other co‑owner, declined to make an order for sale.

Discussion

20.As I understand it, Mr Shek, for the Trustees, heavily relies upon the passage quoted above in Re Citro for the propositions that (i) in applications like the present, the interests of creditors normally prevail over the interests of the other co-owner; and (ii) the stress to the other co‑owner and all the unpleasant consequences of being evicted from one’s family home are “the melancholy consequences of debt and improvidence” and, without more, would not count as “exceptional circumstances” justifying a refusal to grant an order for sale.

21.With respect, that is an over-simplification. Re Citro was decided under the Law of Property Act 1925 which has no equivalent in Hong Kong and the reasoning of Nourse LJ cannot be adopted cart blanche when the court is considering an application under section 6 PO for an order for sale.

22.As Nourse LJ explained in Re Citro at p 150, one of the consequences of the Law of Property Act 1925 (specifically sections 35 and 36: see re Buchanan-Wollaston’s Conveyance [1939] Ch 217) is that the conveyance of a legal estate in land to persons as joint tenants creates a statutory trust for sale and is thus subject to the jurisdiction of the court under section 30.

23.Section 30 of the Law of Property Act 1925 provides:

"If the trustees for sale refuse to sell … any person interested may apply to the court for a vesting or other order … directing the trustees for sale to give effect thereto, and the court may make such order as it thinks fit."

24.In the leading case of Jones v. Challenger [1961] 1 QB 176, the English Court of Appeal, on an application under section 30, held that when property was acquired by a couple jointly for the purpose of providing a matrimonial home, neither spouse has a right to demand a sale of the property while that purpose still exists since that might defeat the object behind the trust. It would be different if that purpose no longer subsists.

25.In Jones v. Challenger, Devlin LJ (as he then was) said, at pp 183-184:

“In the case we have to consider, the house was acquired as the matrimonial home. That was the purpose of the joint tenancy and, for so long as that purpose was still alive, I think that the right test to be applied would be that in In re Buchanan-Wollaston's Conveyance. But with the end of the marriage, that purpose was dissolved and the primacy of the duty to sell was restored. No doubt there is still a discretion. If the husband wanted time to obtain alternative accommodation, the sale could be postponed for that purpose, but he has not asked for that. If he was prepared to buy out the wife's interest, it might be proper to allow it, but he has not accepted a suggestion that terms of that sort should be made. In these circumstances, there is no way in which the discretion can properly be exercised except by an order to sell, because, since they cannot now both enjoy occupation of the property, that is the only way whereby the beneficiaries can derive equal benefit from their investment, which is the primary object of the trust.

It is said that it is hard on the husband that he should have to give up the house which it was his wife's choice and not his to abandon. So it is. But wherever there is a joint occupation, whether it is matrimonial or otherwise, and it is brought to an end, it may involve hardship and inconvenience on the person who would have preferred it to go on. If the wife had died and left her share under the trust to a stranger, I think that the house would obviously have had to be sold. The position is the same if the marriage is ended by divorce, for the court is not under section 30 concerned with the reasons for the ending of the marriage or the rights and wrongs of it; it can only take note that the object of the trust, so far as it required the preservation of the realty, has been fulfilled.

…Let it be granted that the court must look into all the circumstances; if when the examination is complete, it finds that there is no inequity in selling the property, then it must be sold ...The conversion of the property into a form in which both parties can enjoy their rights equally is the prime object of the trust; the preservation of the house as a home for one of them singly is not an object at all. If the true object of the trust is made paramount, as it should be, there is only one order that can be made.”

26.It is in light of the aforesaid statutory background and the authorities decided thereunder that Nourse LJ expressed his view that, in deciding whether to make an order for sale in favour of a trustee in bankruptcy under section 30 of the Law of Property Act 1925, “the voice of the creditors will usually prevail over the voice of the other spouse and a sale of the property ordered within a short period. The voice of the other spouse will only prevail in exceptional circumstances.” With the greatest respect to Nourse LJ, this court does not see his observation in Re Citro as having universal application, regardless of the statutory regime under which a court is to decide the competing claims of a trustee in bankruptcy on the one hand and a co-owner of property on the other.

27.It must be stressed, even under the regime of the Law of Property Act 1925, the requirement of “exceptional circumstances” has been regarded, expressly or impliedly, by judges of great eminence, including Hoffmann J and Bingham LJ in Re Citro, to be unwarranted.

28.In Re Citro, Bingham LJ (as he then was), while concurring with the judgment of Nourse LJ, expressed his own views at pp 160-161 as follows:

“Section 30 of the Law of Property Act 1925 confers two discretions. First, it confers a discretion on "any person interested" to "apply to the court … for an order directing the trustees for sale to give effect thereto." Second, it confers a discretion on the court to "make such order as it thinks fit." The section contains no express limitation on the exercise of these discretions but neither is altogether unfettered. Where a trustee in bankruptcy is a person interested, his statutory duty to realise the bankrupt's assets for the benefit of the creditors may well require him in the ordinary way to seek an order for sale of the trust property where such sale is likely to raise money available for distribution. Where the court is asked by a trustee in bankruptcy to make an order of sale, the authorities show that it usually does so: see In re Holliday [1981] Ch. 405, 419G and 420B. In deciding whether, on the breakdown of a marriage, the voice of the trustee or the voice of a wife ought in equity to prevail, the court must consider all relevant circumstances, including the conflicting legal and moral claims of the creditors asserted through the trustee in bankruptcy on the one hand and those of the wife and her children on the other: In re Holliday, at pp. 421E and 420B. But if the court is not to order a sale it seems that the wife must show "very special circumstances" (p. 415F) or "good reasons" (p. 424C) or "a substantial case of hardship" (p. 425H) or "exceptional circumstances:" In re Lowrie [1981] 3 All E.R. 353, 355J. I should for my part have inclined to think that a test of exceptional circumstances was, in the absence of statutory guidance, more stringent than was warranted (as, in a quite different context, the House of Lords held in Kleinwort Benson Ltd. v. Barbrak Ltd. [1987] A.C. 597, 622G), but I have to acknowledge that in enacting section 336(5) of the Insolvency Act 1986 Parliament appears to have expressly approved it…

“Sir David Cairns listed the factors in In re Holliday which led him to conclude, at p. 425, that the wife's voice should prevail. They were: (i) that it would be difficult if not impossible for the wife to secure another suitable home for the family in or near her then home; (ii) that it would be upsetting for the children's education if they had to move far away from their present schools, even if it were practicable, having regard to the wife's means, to find an alternative home at some more distant place; (iii) that it was highly unlikely that postponement of the payment of the debts would cause any great hardship to any of the creditors; (iv) that none of the creditors thought fit themselves to present a bankruptcy petition and it was quite impossible to know whether any one of them would have done so if the debtor had not himself done so. Although less explicitly stated, the same factors were no doubt in the mind of Buckley LJ…

“…As I read [Hoffmann J[1]’s] judgment, he treated In re Holliday as entitling or obliging him simply to balance the interests of the creditors against those of the wife, the creditors' prima facie entitlement to their money being simply one element in the scales - and not a particularly weighty one at that. I would willingly adopt this approach if I felt free to do so. It is in my view conducive to justice in the broadest sense and it reflects the preference which the law increasingly gives to personal over property interests. I do not, however, think it reflects the principle which, as I conclude, clearly emerges from the cases, that the order sought by the trustee must be made unless there are, at least, compelling reasons, not found in the ordinary run of cases, for refusing it. I find it impossible to reach that conclusion on the present facts, which I would expect to be substantially repeated in many other cases of this kind.

As I have, I think, made clear, I regret this conclusion. But we must apply the law as we understand it, and where authority has indicated how a discretion should be exercised in the unexceptional case it is desirable that it should be followed, unless overruled, if arbitrariness is to be avoided. I do not think we are free to overrule the authority relevant to these appeals, and indeed it would be improper given the terms of section 336(5) of the Act of 1986.” (emphasis added)

29.In Re Holliday [1981] Ch 405, 424, Buckley LJ analysed the competing interests of a trustee in bankruptcy and a co-owner of property in these terms which I find convincing and would gratefully adopt:

"Of course, the creditors are entitled to payment as soon as the debtor is in a position to pay them. They are entitled to payment forthwith; they have an unassailable right to be paid out of the assets of the debtor. But in my view, when one of those assets is an undivided share in land in respect of which the debtor's right to an immediate sale is not an absolute right, that is an asset in the bankruptcy which is liable to be affected by the interest of any other party interested in that land, and if there are reasons which seem to the court to be good reasons for saying that the trust for sale of the land should not be immediately enforced, then that is an asset of the bankruptcy which is not immediately available because it cannot be immediately realised for the benefit of the creditors." (emphasis added)

30.Unlike Bingham LJ in Re Citro, this court is free from the fetters of the authorities decided under the Law of Property Act 1925 as well as section 336(5) Insolvency Act 1986 which compel the court to give primacy to the interests of the bankrupt's creditors save in “exceptional circumstances”. If so, this court will gladly adopt the approach of Hoffmann J (as he then was) in re Citro and the analysis of Buckley LJ in Re Holliday in preference to that of Nourse LJ.

31.In my judgment, in any application for the sale of co‑owned property under section 6 of PO, the trustees in bankruptcy (representing the voice of the creditors) is in no better position than the bankrupt himself prior to his bankruptcy. As a co-owner, neither the bankrupt (prior to his bankruptcy) nor his trustee in bankruptcy has any superior right over the other co-owner in dictating whether the property should or should not be sold. This is so whether the other co-owner is the spouse or another family member of the bankrupt, e.g. the mother in Re Leung Wang Fai supra, or otherwise who resides in the property and will necessarily face eviction should an order for sale of the property be made.

32.As Recorder Joseph Fok SC pointed out in Wong Chun Kei v Poon Vai Ching supra, the court should not make an order for sale if, viewed objectively, such an order will not be beneficial to all the co‑owners or that it will result in “very great hardship” to one co‑owner. This court does not read Recorder Joseph Fok SC’s judgment as laying down any hard and fast rule that the wishes of a co-owner who opts for an order for sale under the PO must necessarily or usually prevail over the wishes of another co-owner who opposes it. The matter can only be decided on the basis of all the objective facts of the case, balancing the interest of the one against the other: Wong Chun Kei v Poon Vai Ching at [106] – [108].

33.On the evidence before this court, it is plain and obvious that the Property is the only asset of Madam Chow which is of any significant value. It is also the only place of residence for her (and the bankrupt). In view of their age and medical conditions, it is highly unlikely that Madam Chow (or the bankrupt) will be able to find any stable employment in the job market with a decent monthly salary. The probabilities are that both of them will continue to depend on the meagre social welfare pay outs from the Government and income from odd jobs to pay for their recurrent living expenses.

34.Assuming the Property is sold in the Home Ownership Scheme secondary market for HK$2 million, the amount available to the bankrupt’s estate and Madam Chow in equal share will be HK$1 million each, subject to deduction for the costs and expenses incidental to the sale and legal costs. As calculated by Mr Shek, the estimated balance due to Madam Chow, after all deductions, would be around HK$870,000. The HK$1 million payable to the bankrupt’s estate is liable to further deduction for the bankrupt’s indebtedness and interest, as well as the remuneration and disbursement of the Trustees. No estimate of the amount of deduction has been provided by the Trustees. While there may be a balance due to the bankrupt after all these deductions, the sum is unlikely to be substantial.

35.In the present day and age of Hong Kong, this court has serious doubt whether Madam Chow (or the bankrupt) is able to purchase appropriate alternative accommodation if the Property is sold. At their age and without stable employment, it will be virtually impossible for them to obtain mortgage to finance their purchase of another residence – the only alternatives will be to rent a modest flat, or, more likely to be the case, a room as residence or to move into a subsidized home for the elderly run by charities. Given the prevailing rental market in Hong Kong, HK$870,000 would not be sufficient to pay for the rental of another residence for a long time. Paraphrasing the words of Mimmie Chan J in Re Leung Wang Fai supra at [28], requiring an elderly and ailing couple to move out of their already modest home of over 15 years would, in my view, create very grave hardship to Madam Chow. The alternative of forcing her to move into a home for the elderly, even if available, would be extremely harsh and would equally constitute “very great hardship”.

36.To conclude, balancing the interests of the Trustees (representing the three creditors) and the interests of Madam Chow, I am firmly of the view that the only just result, objectively speaking, is to decline to order the sale of the Property.

37.If I am wrong in not following Nourse LJ in Re Citro and if it is necessary for Madam Chow to establish “exceptional circumstances”, in my judgment, the circumstances of the present case are indeed exceptional.

38.In Everitt v Budhram & anr [2010] Ch 170 at [55], Henderson J summarized the case law on this topic as follows:

“55 The existing case law establishes that the kinds of circumstances which may properly be regarded by the court as exceptional in this context include medical or mental conditions of a co‑owner of property, the co-owner in question being the co-owner other than the relevant bankrupt. This was expressly recognised by Lawrence Collins J in Dean v Stout [2006] 1 FLR 725, para 7 where he said: "typically the exceptional circumstances in the modern cases relate to the personal circumstances of one of the joint owners, such as a medical or mental condition." He went on to say, at para 8: "the categories of exceptional circumstances are not to be categorised or defined and the court makes a value judgment after looking at all the circumstances." However, the circumstances must be in the true sense exceptional and outside what Nourse LJ referred to at p 157 as the usual "melancholy consequences of debt and improvidence": see In re Citro (Domenico) (A Bankrupt) [1991] Ch 142, 159-160.”

39.Adopting the test propounded byJonathan Sumption QC in Re Bremner supra, I regard the personal circumstances of Madam Chow including her age, her medical conditions and her heavy dependence on the bankrupt (who in turn is of advanced age, has chronic medical issues and is dependent on social welfare) in the foreseeable future as circumstances lying outside the ordinary range of problems associated with a bankruptcy and thus are “exceptional”.

40.For these reasons, I would also decline to order the sale of the Property.

Disposition

41.The Trustees’ application is accordingly dismissed.

42.Leave to the parties to file written submissions, if they see fit, on the appropriate costs order that this court should make within 7 days from the date hereof, failing which there shall be no order as to costs. 

Mr J Shek, of Gallant Y T Ho & Co, for the Joint and Several Trustees of the property of the bankrupt (the applicants)

The bankrupt: Mr Cheung Chan Hong (張燦康), appeared in person

The respondent: Madam Chow Lau Kwai (周柳葵), appeared in person

Attendance of the Official Receiver was excused