Lo Kwok Kuen Danway v. Secretary for Justice for and on behalf of the Government of the Hong Kong Special Administrative Region

DCCJ 2792/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2792 OF 2013

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JUDGMENT

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1.This is an application by the plaintiff, Mr Danway Lo, for, inter alia, 2 declaratory reliefs to the effect that upon the discharge of the plaintiff's bankruptcy on 14 December 2009:-

(1) he was released from all bankruptcy debts including the taxed costs and garnishee costs of his judicial review application (which was awarded in favour of the Commissioner of Police against him by the High Court on 30 September 1999); and

(2) the Hong Kong Government is not entitled to rely on section 31(2)(a) of the Pension Benefits Ordinance (Cap 99) to apply his pension benefits to satisfy the taxed costs and the garnishee costs.

The facts

2.The background events and facts which gave rise to this application for the above declarations are substantially agreed, and can be summarized as follows:-

(1) The plaintiff was a police officer who, in about 1998, was subject to disciplinary proceedings as a result of which the Commissioner of Police imposed upon him a penalty on 3 February 1999, whereby he was compulsorily retired on 11 February 1999 with deferred pension benefits.  Due to the penalty, his entitlement to his accrued pension rights governed by the Pension Benefits Ordinance (Cap 99) was deferred to 19 February 2012, when he would attain the age of 55;

(2) However, soon after the penalty, the plaintiff applied for a judicial review of the Commissioner’s decision in HCAL 49 of 1999.  On 30 September 1999, his application was dismissed by the High Court with costs, later certified by an allocatur dated 12 July 2002 at $328,360. By 3 November 2004, he became indebted to the commissioner for $493,586.71 consisting of, inter alia, the taxed costs, the garnishee costs, and the interest thereon;

(3) On 4 November 2004, the Secretary of Justice, acting for the Commissioner, served upon the plaintiff a statutory demand under section 6A(1)(a) of the Bankruptcy Ordinance (Cap 6) demanding immediate payment of the debt.  By 7 September 2005, due to plaintiff’s continuing indebtedness, bankruptcy proceedings under HKB 6923 of 2005 were instituted against the plaintiff, and a bankruptcy order was subsequently made against him on 14 December 2005.  By the time the proof of debt was submitted on 7 February 2006 by the Secretary of Justice (who turned out to be the only creditor), the outstanding debt increased to around $525,473.42, due mainly to interest on the taxed costs being calculated up to the grant of the bankruptcy order;

(4) However, by 14 December 2009, which was 4 years after the making of the bankruptcy order on 14 December 2005, the debt still remained unpaid. By 4 October 2010, a Certificate of Discharge was granted, discharging the plaintiff from bankruptcy under section 30A of Cap 6.  The Plaintiff’s contention is that by reason of the discharge, and by virtue of section 32 thereof, he has, ever since 14 December 2009, been released from all bankruptcy debts, including the then proven debt of $524,473;

(5) However, on about 17 February 2012, just before the plaintiff had attained the age of 55 on 19 February 2012, the Government’s Treasury informed him that it would be entitled to make a 25% deduction from the pension benefits payable to him in settlement of the then outstanding debt of $520,837.87.  The plaintiff’s contention, however, is that by reason of the Certificate of Discharge, he was entitled to be paid his pension benefits in full without deductions, consisting of pension gratuity payable on 19 February 2012 in the lump sum of $960,108.63, and thereafter,  monthly pensions at the rate of $5,714.93 per month.  In the events which followed, the Treasury nevertheless deducted $240,027.15 from the lump sum pension of $960,108.63, being 25% thereof, and since then, has been deducting $1,428.73 every month from the monthly pension of $5,714.93, being 25% of the monthly pension.

Issue as to the true significance of section 32(2) of the Bankruptcy Ordinance

3.The legal issues relate primarily to the construction of certain provisions in the Bankruptcy Ordinance (Cap 6) and the Pension Benefits Ordinance (Cap 99).  The fundamental tenement of the plaintiff’s contention is that by virtue of sections 30A and 32 of Cap 6, he has been released from the outstanding subject debt of $520,837.87 ever since December 2009, 4 years after he was adjudicated bankrupt. One of the effects of section 30A(2) is that a bankrupt is usually discharged from bankruptcy upon the expiration of 4 years after his being adjudicated bankrupt.  Section 32(2)(a) provides, subject to certain exceptions which do not apply to the instant case, that:-

“where a bankrupt is discharged, the discharge releases him from all the bankruptcy debts, but has no effect:-

(a) on the functions (as far as they remain to be carried out) of the trustee and the operation of the provisions of this Ordinance for the purposes of carrying out those functions;”

I also understand the plaintiff to contend that in his case, there is no administrative function left to be carried out by the trustee, or if there remains anything to be administered, it does not impact on his release from all bankruptcy debts. However, it is clear that section 32(2)(a) envisages cases where even after a bankrupt's discharge, the trustee may still have unfinished business relating to the bankruptcy debts which require the administration of the estate to continue, for section 2 of Cap 6 defines “bankruptcy debt” in relation to a bankrupt as:-

“(a) any debt or liability to which he is subject at the commencement of the bankruptcy; and

(b) any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reasons of any obligation incurred before the commencement of the bankruptcy.”

4.Further, section 30A(8) of the Bankruptcy Ordinance (Cap 6) also states:-

“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 to such other things,

as the trustee requires for the purpose of completing the administration of the estate, and if the 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.”

It is therefore quite clear that under section 30A(8), a discharged bankrupt is still obliged to assist the trustee to complete the administration of the estate including the realization of the property vested in him for distribution to the creditors.  See para 27 of Re Cheung Tak Wah (a bankrupt) [有關張德華（破產人）] HCB 4980/2004, per Kwan J (now Kwan JA).  It has also been said, generally, that if a discharge of the bankrupt invariably had the effect of releasing all bankruptcy debt, the trustee would have no obligation to realize any property after the discharge to distribute the proceeds to the general body of creditors in settlement of the released bankruptcy debt.  See per Mimmie Chan J in Yick Kin Chung (a bankrupt), HCB 1187/2004, para 20.

5.Notwithstanding the above, Mr Koo, who appears for the plaintiff, has cited a case, Ng Wing Shing v Secretary for Justice (HCMP 1236 of 2006, 19 December 2006), which he submits, lends support for his proposition that upon the discharge from bankruptcy, it is possible for a bankrupt to be discharged from all debs, and to enjoy the benefit of his pension in its entirety.  However, from my reading of this case, I am not convinced that the type of cases envisaged there applies to the instant case before me.  

6.In Ng Wing Shing, the plaintiff was a civil servant who had applied in 1995 for a home purchase scheme loan to acquire a property, granted on the security of a second mortgage as well as his salary and pension.  Thereafter, the repayment instalments involved a deduction of $6,000 every month from his salary, an arrangement which he of course could not unilaterally revoke.  Some 4 years later in July 1999, he became bankrupt, and the property became vested in the Official Receiver. This event triggered off the Government’s entitlement to immediate repayment of the outstanding balance of the loan, which then stood at about $367,000.  However, although the loan was secured by, inter alia, the plaintiff’s salary and pension as a matter of law – see Choi Lai Ming ex parte Official Receiver [2006] 1 HKLRD 7, paras 58 to 59, for the view that under the Government’s home purchase scheme, the Government has security rights over civil servants' salaries and pensions – the Government appeared to have initially taken the position that these were not security for the loan, and hence, lodged a proof of debt which listed only the second mortgage as security, but not the salary and pensions, and paid the plaintiff his entire salary without deductions. On this basis, for the following 39 months until October 2002, the Official Receiver as the trustee in bankruptcy received from the plaintiff $23,600 every month, and during this period, paid the Government 2 dividends in the total sum of $38,000.  However, in November 2002, after receiving legal advice, the Government decided to resume making the monthly deductions of $6,000 from the plaintiff’s salary despite the plaintiff's objections, whereupon the Official Receiver reduced the plaintiff’s monthly contribution from $23,600 to $17,600.  The Government had, by then, changed its mind about the status of the purported unsecured debt, and subsequently withdrew its proof of debt (with the Official Receiver’s permission but without consulting the plaintiff), and repaid to the Official Receiver the dividends it had received. The monthly deductions continued until the plaintiff was automatically discharged from bankruptcy in July 2003, 4 years after he was adjudicated bankrupt.  In December 2003, the plaintiff retired, and became entitled to his pension.  However, the Government, treating the debt as still outstanding, deducted a net sum of $398,378.07 from his pension comprising the outstanding loan of $367,000 at the date of bankruptcy and interest at the normal rate under the loan scheme.

7.After a trial at which the plaintiff did not have the benefit of legal representation, his action against the Secretary for Justice (representing the Government) was dismissed.  After leave of appeal was refused by both the trial judge and by Tang JA (now Tang PJ), the ex parte application for leave by the plaintiff (acting in person) came before Yeung and Yuen JJA in the Court of Appeal, and the plaintiff was eventually granted leave to appeal.

8.As Mr Koo has pointed out, Yuen JA, giving her reasons for the grant of leave, did express in para 15, her preliminary view that on the supposed scenario that the loan was deemed not secured on the plaintiff’s salary and pension (in contrast to the other possible scenario where the loan was deemed secured thereon), then, upon the plaintiff's discharge of bankruptcy (in July 2003):-

“the Plaintiff would be discharged from all his debts …” and “after his discharge from bankruptcy, the Plaintiff would be able to enjoy the benefit of his pension in its entirely.”

However, it seems to me that Yuen JA arrived at such a preliminary view because it could at least be later argued on appeal that at the time the plaintiff was adjudicated bankrupt in July 1999, his pension did not vest in the Official Receiver as a trustee, because it had not yet been crystallized as a “property” within the meaning of the Bankruptcy Ordinance, so that it never formed any part of the bankrupt's estate even before his discharge.  This is my understanding of the rationale by which the Court of Appeal must have come to such a preliminary view for the purposes of granting the plaintiff leave to appeal.

9.However, in the instant case before me, there is a key factor which is materially different: at the time when Mr Danway Lo was adjudicated bankrupt in December 2005, he had already been compulsorily retired in February 1999 as a consequence of the disciplinary proceedings, with deferred pension benefits to be paid 13 years later upon his attaining the age of 55 in Feb 2012.  So unlike the case of Ng Wing Shing, at the time of the adjudication of Mr Lo’s bankruptcy, his pension benefits would prima facie have become part of the bankrupt's estate and vested in the trustee in bankruptcy as “property” within the meaning of Cap 6, so that upon his discharge, the proven debts cannot be treated as released.

10.The relevant part of section 43(1) provides for the definition of a bankrupt's estate as comprising "all property belonging to or vested in the bankrupt at the commencement of the bankruptcy". And "property" is widely defined in the Bankruptcy Ordinance under the interpretation section in section 2 as including:-

“money, goods, things in action, land and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as above defined.”

Undoubtedly, this definition is at least broad enough to cover the crystallized rights or chose in action of February 1999 when Mr Lo was compulsorily retired with deferred pension benefits, even though arguably, the definition may not be broad enough to include Mr Ng’s yet to be crystallized pension rights.  Although the appeal was not eventually heard, and the kind of distinction or subtlety suggested here has not yet been tested in the Hong Kong courts, there are ample authorities which clearly establish the proposition that where there are future and contingent interests vested in the trustee at the time of the bankruptcy order, a bankrupt’s proven debts are not released even after his discharge as a bankrupt.

11.In Ng Shiu Fan [2008] 4 HKLRD 813 at 821-822, paras 13-18, Kwan J explained this point in the context of Mr Ng Shiu Fan’s provident fund benefits as follows:-

“15.  Section 43(1) provides for the definition of the bankrupt’s estate.  The relevant part reads: “Subject to this section and ss.43A-43E, a bankrupt’s estate comprises – (a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy.”  The term “property” for the purpose of the Bankruptcy Ordinance, is defined in s. 2 to include “things in action … present or future, vested or contingent, arising out of or incident to property as above defined.”  Further, s. 43(4) stipulates that “references in this Ordinance to property, in relation to a bankrupt, include references to any power exercisable by him over or in respect of property …; and a power exercisable by him over or in respect of property is deemed to vest in the person entitled to exercise it at the time of the transaction or event by virtue of which it is exercisable by that person (whether or not it becomes so exercisable at that time).”  Under s. 53(4), “where any part of the property of the bankrupt consists of things in action, such things shall be deemed to have been duly assigned to the trustee.”

16.   By s. 58(1), “until a trustee is appointed the Official Receiver shall be the trustee for the purposes of this Ordinance, and immediately on a debtor being adjudged bankrupt the property of the bankrupt shall vest in the trustee”.  Under sub-s. (2), “on the appointment of a trustee the property shall forthwith pass to and vest in the trustee appointed.”  Subsection (3) provides that "the property of the bankrupt … shall vest in the trustee … without any conveyance, assignment or transfer whatever.”

17.   By these provisions, all property, including things in action, present or future, vested or contingent, belonging to or vested in the bankrupt at the date of the bankruptcy order vests in the trustee immediately upon his appointment.  The legal right of Mr Ng to be paid the amount in credit in his account as provided in r. 13 [ie, the Subsidized Schools Provident Fund Rules (Cap 279D)], namely the Benefits mentioned earlier, is an immediate chose in action and falls within the definition of “property” in Cap. 6.  He had a present legal right to require the board of control of the Fund to make payment to him in the future when one of the contingencies provided for in r.13 arose.  That right formed part of his estate for the purpose of s. 43(1)(a) and was vested in the Official Receiver immediately on his becoming the trustee by s.58(1) and (2).  The fact that nothing was immediately payable to Mr Ng under r. 13 at the commencement of his bankruptcy did not alter in any way the nature of the right as a chose in action, and is irrelevant to the exercise and vesting of the right …  .

18.   I hold that by the combined effect of the above statutory provisions, the Benefits formed part of Mr Ng’s estate and would have vested in the Official Receiver in the absence of an effective non-alienation provision.  Mr Ng’s discharge from bankruptcy does not have the effect of transferring the ownership of the Benefits back to him.  The Benefits would remain vested in the Official Receiver after his discharge.”

12.On appeal (see Ng Siu Fan [2009] 4 HKLRD 774, para 18), the Court of Appeal quoted the above paras 17 and 18 of the learned Judge, and adopted her view that Mr Ng’s discharge did not have the effect of transferring the ownership of the provident fund benefits back to him, even though the case was overturned on a point relating to the rule in Re Condon ex p James, a rule based on the principles of morality which is not relevant to the matter before me.

13.Likewise, in Tam Mei Kam [2012] 4 HKLRD 345, which was a case relating to the Inheritance (Provision for Family and Dependants) Ordinance (Cap 481), Barma J (now Barma JA) also took the same view, and elaborated his reasons as follows:-

“In the case of pension payments which derive from rights already vested in the bankrupt at the time of the bankruptcy, even though these may only be payable after the date of the bankruptcy, the bundle of rights giving rise to the payments is present property vested in the bankrupt, which will vest in the trustee on the making of a bankruptcy order, and the later payments made in consequence of those rights will similarly belong to the estate (see Re Landau (a bankrupt), Krasner v Dennison and Patel v Jones). .... .

14. It should be noted that a consequence of this treatment is that where income derives from property that falls into the bankruptcy estate, that income will remain payable to the trustee for the benefit of the bankrupt even after his discharge from bankruptcy, since property vested in the trustee does not re-vest in the bankrupt after discharge, and remains available to be used in satisfying the bankruptcy debts.”

Hence, due to the above statutory provisions and the compelling reasons explained in the above cases, though obiter, I cannot accept Mr Koo’s submission that the subject debts are discharged (in the sense the plaintiff claims) by reason of section 32(2) of Cap 99.

Issue as to the non-alienability of the Government’s rights to pension benefits

14.However, the declaratory relief of discharge from the subject debts sought by the plaintiff, cannot be simplistically dismissed merely on the basis that his pension benefits have become part of the bankrupt's estate and are capable of being vested in the trustee in bankruptcy.  The reason being that even though the pension might have become a bankrupt’s property as future and contingent choses in action, the plaintiff's pension benefits have not vested in the trustee for the benefit of any general body of creditors, for indeed there exists an effective non-alienation provision which prohibits such vesting. 

15.In this connection, I am in agreement with one of the views submitted by Mr Suen for the Secretary of Justice that such a non-alienation provision can be found in section 28 of the Pension Benefits Ordinance (Cap 99).  It provides that:-

“(1) If any person to whom a pension has been granted is adjudicated bankrupt or is declared insolvent by judgment of any court, subject to subsection (5), payment of the pension shall cease as from the date on which he is so adjudicated.

(2) If any person is adjudicated bankrupt or declared insolvent:-

(a) after retirement in circumstances in which he is eligible for pension but before the pension is granted, any pension eventually granted to him shall cease as from the date of adjudication or declaration, as the case may be; or

(b) before such retirement, and he has not obtained his discharge from bankruptcy or insolvency at the date of his retirement, a pension may be granted to him, but, subject to subsection (5), payment on foot thereof shall forthwith cease.

(3) Where a pension ceases under subsection (1) or (2), the Chief Executive may, from time to time during the remainder of the person's life, or during such shorter period or periods, either continuous or discontinuous, as the Chief Executive shall think fit, direct that ex gratia payment of all or any part of the moneys to which such person would have been entitled by way of pension had he not been adjudicated bankrupt or declared insolvent be paid to, or applied for the maintenance or benefit of all or any, to the exclusion of the other or others, of the following, that is to say, such person and any spouse, child or children of such person or such other of this dependants as the Chief Executive may determine, in such proportions and manner as the Chief Executive thinks fit, and such moneys shall be paid or applied accordingly.

(4) Moneys applied for the discharge of the debts of the person whose pension has ceased under subsection (1) or (2) shall, for the purposes of this section, be regarded as applied for his benefit.

(5)  Where, by virtue of subsection (1) or (2), payment to a person of a pension granted to him is not being made and the person obtains his discharge from bankruptcy or insolvency, as the case may be, payment of the pension shall be restored to him as from the date on which he is so discharged.”

16.Section 28 clearly provides for a mandatory cessation of pension payments to a bankrupt in 3 kinds of situations:-

(1)  where a person receives pensions and is then adjudicated bankrupt, pension payments shall cease as from the date of adjudication (as in section 28(1));

(2)  where he has retired but before receiving his pensions, he has been adjudicated bankrupt, pension payments eventually granted to him shall cease as from the date of adjudication (as in section 28(2)(a)); and

(3)  where he has been adjudicated bankrupt but has not obtained a discharge from bankruptcy, and then retires (as in section 29(2)(b)), pension payments on foot shall forthwith cease.

In all these 3 situations, section 28(5) provides for a mandatory restoration of pension payments as from the date of a bankrupt's discharge from bankruptcy. Hence, it is clear that neither the bankrupt nor his trustee in bankruptcy can prevent the cessation of pension payments and their restoration, or interfere with the Chief Executive's discretion to direct ex gratia payments of pension moneys to the bankrupt's dependents. Even though section 28 of Cap 99 does not contain an explicit provision which prevents the vesting of pension benefits in a trustee in bankruptcy (unlike a host of pension legislations in the United Kingdom), I have no doubt that a non-alienation effect must be read into this provision.

17.There is also support for this interpretation in a number of cases, although all obiter. As observed by Kwan J in paras 35 to 37 of Ng Shiu Fan, a case concerning provident funds, the learned Judge referred to section 28 of the Pension Benefits Ordinance (Cap 99), which applies to officers in public service other than judicial officers, and the equivalently worded provision in section 13 of the Pensions Ordinance (Cap 89), which applies to officers in public service in a civil capacity. Her ladyship's observation was also accepted on appeal.  Delivering the judgment of the Court of Appeal in Ng Siu Fan, Tang VP (in para 23) meant to endorse her view that section 13 of Cap 89 (and a fortiori section 28 of Cap 99) has a non-alienation effect, in contrast to section 12 of Cap 89 (and its equivalent in section 31 of Cap 99), which does not.

Whether the Government is a secured creditor

18.On the basis that the plaintiff’s pension benefits cannot be alienated in favour of the bankrupt’s estate, there is no question that the Government must be a secured creditor.  In Choi Lai Ming Barma J, expressed the view that the Government stood as a secured creditor to the pensions of Mr Choi, a bankrupt civil servant.  In para 58, after determining in the affirmative the contested issue as to whether the Government was a secured creditor of Mr Choi’s salary, the learned Judge said:-

“So far as Mr Choi’s pension is concerned, it seems to me that the position is similar. The question of whether the Government was a secured creditor in respect of Mr Choi’s pension was not the subject of as much argument, perhaps because this was not an asset that could form part of his bankruptcy estate.”

Likewise, I too have no difficulty in holding that the Government also stands as a secured creditor to the plaintiff's pension benefits.

Issue as to whether the Government is entitled to statutory deductions from pension benefits after the plaintiff’s discharge from bankruptcy, pursuant to section 31 of the Pension Benefits Ordinance

19.The next issue that falls to be resolved is whether, notwithstanding the plaintiff's discharge from bankruptcy, the Government, as a secured creditor of an outstanding debt, is entitled to the statutory deductions from the plaintiff’s pension benefits upon the plaintiff’s reaching his deferred retirement at the age of 55, pursuant to section 31(2)(a) of Cap 99.  Sections 31(2) state as follows:-

“(a) Where any person to whom pension benefits are granted owes a debt to the Government, subject to paragraph (b), the Director of Accounting Services may apply those benefits, either in whole or in part, for the satisfaction, or partial satisfaction, of the debt.

(b) Where –

(i) a person owes a debt to the Government arising otherwise than on account of tax payable under the Inland Revenue Ordinance (Cap 112); and

(ii) the person has not consented to the exercise, in relation to pension benefits granted to him, of the power conferred on the Director of Accounting Services by this subsection,

the amount applied in such exercise shall not, as regards a particular such benefit, exceed an amount equal to 25% of the benefit.”

20.The answer to the above issue lies expressly in section 31(3), which unequivocally states that:-

“Discharge does not affect the right of any secured creditor of the bankrupt to enforce his security for the payment of a debt from which the bankrupt is released.”

21.On section 32(3) of Cap 89, Barma J in para 67 of Choi Lai Ming also had this to say:-

“In my view, the clear meaning of that provision is that, notwithstanding that the bankrupt has been released from the debt by reason of his discharge, the secured creditor remains able to enforce his security for the payment of such debt. That can only mean that the creditor remains able to satisfy himself out of such security. The consequence is, therefore, that the Government will be entitled to continue to have recourse to Mr Choi's salary (and, if necessary, pension and other sums due to him from the Government).”

I have therefore no doubt in holding that the Government is entitled to make the statutory deductions under section 31(2) of Cap 99, and that under section 31(3) thereof, it retains such a right even after the discharge of the plaintiff's bankruptcy.

Issues of estoppel and surrender of security.

22.However, the debates do not stop here, for it is also one of the plaintiff’s arguments that by the Government’s having submitted its proof of debt as an unsecured creditor, it is either estopped by conduct from treating itself as a secured creditor, or has irrevocably surrendered its security for the payment of the subject debt by reason of the express wordings in all the relevant documents.  Mr Koo pointed out that:-

(1)   The Statutory Demand dated 3 November 2004 expressed stated the debt to be “unsecured”, with a note stating that “If the creditor holds any security the amount of the debt should be the sum the creditor is prepared to regard as secured for the purposes of this demand.  Brief details of the total debt, should be included in column (2), and the nature of the security and the value put upon it by creditor, as at the date of the demand, must be specified”;

(2)   The Government also stated in the bankruptcy petition that, “The petitioner does not … hold any security on the debtor’s estate”;

(3)   In the submitted Proof of Debt (Form 46/a) dated 7 February 2006, the “Important Notes for Creditors” expressly state that, “Incorrect completion of the form … may also affect … “any security …”, and that, “If you fail to disclose your security, you may be deemed to have surrendered that security for the general benefit of the creditors”;

The point is that by reason of these express caveats and the Government's conduct, the Government is either estopped from treating itself as a secured creditor or otherwise must have surrendered its security for the payment of the debt.

23.Prima facie, the estoppel or surrender point appears to be worth making.  Quite apart from the above, I should also bear in mind rule 99I of the Bankruptcy Rules (Cap 6A), which provides that:-

“(1) For the purpose of voting, a secured creditor shall, unless he surrenders his security, state in his proof the particulars of his security, the date when it was given and the value at which he assesses it, and shall be entitled to vote only in respect of the balance (if any) due to him after deducting the value of his security.

(2)  If he votes in respect of his whole debt he shall be deemed to have surrendered his security unless the court on application is satisfied that the omission to value the security has arisen from inadvertence.”

24.In a similar vein, Rule 5A of the Proof of Debt Rules (Cap 6E) states that:-

“If it is found at any time that the proof made by … a secured creditor has omitted to state that he is a secured creditor, the secured creditor shall surrender his security to the trustee for the general benefit of the creditors unless the court on application is satisfied that the omission has arisen from inadvertence in which case the court may allow the proof to be amended upon such terms as to the repayment of any dividends or otherwise as the court may consider just.”

25.The relevant test for inadvertence is not contested. It has been pointed out by Mr Suen that in Ex parte Clarke (1892) 67 LT 232 at 233, Vaughan William L J explained the test in these terms:-

“In my opinion the meaning of the rule is, that the creditor who has voted and has omitted to value his security ought always to be allowed to withdraw his proof and to be relieved from being deemed to have surrendered his security unless he has elected really to abandon his security; that is, unless he has omitted to do that which he did omit, deliberately and on purpose. If it has been done accidentally he ought, on such terms as the court may think fit to impose, to be relieved from the loss of his security …

If I arrive at the conclusion that [the creditor], having this choice before him, balanced the advantages and deliberately elected to prove, it is plain that he is not entitled to the benefit of being allowed to withdraw his proof on the ground of its being made by inadvertence.  On the other hand, if I think that [the creditor] really left the matter in his solicitor’s hands and proved for the debt, making the mistake of not mentioning the security and without consideration of the respective advantages of proving and not proving, the would come within the clause. It is a question of fact …”

26.However, the issue of estoppel has not been pleaded in compliance with O 18 r 8 of the District Court Rules (Cap 336H), considering that as a general rule, estoppel must be specifically pleaded unless there is no opportunity to do so.  See respectively, Li Kwai Fong Ah Pat v Bachy Soletanche Group & Another (unrep CACV 30/1989), and Large Land Investments Ltd v Cheung Siu Kwai [2003] 1 HKLRD 313. Neither has the plea been made the subject of an amendment to the statement of claim at trial.  For this reason, I shall decline to deal with the issue of estoppel here.

27.As for the plaintiff's other point that the Government has surrendered its security, and therefore is not entitled to the statutory deduction under section 31(2) of Cap 99, I do take the view that the point is misconceived. In a normal case of a secured creditor in the context of bankruptcy where no non-alienation statutory provisions apply, it is of course true that a secured creditor may either voluntarily or inadvertently surrender its security for the benefit of the general body of unsecured creditors, in which case, the surrendered security does vest in the trustee as part of the bankrupt's estate. However the defendant's standing as a secured creditor should not be confused with that of the normal secured creditor being contemplated above, because here, the non-alienation provision of section 28 of Cap 99 applies. As a result, the Government's security cannot possibly be surrendered to become part of the bankrupt's estate. In this connection, I am also minded that the cessation and restoration of pension benefits under section 28 of Cap 99 is not expressed as a right that anyone (whether the pensioner, the Government or the Chief Executive), can surrender or not surrender but are mandatory. Hence, I do not accept that the plaintiff's submissions regarding the Government's surrender of security and its disentitlement to the section 31(2) deductions are valid.

28.Even if I am wrong on rejecting the plaintiff's contentions, which I doubt, I cannot see how such a misjudgment can make any favourable difference to the end result for the plaintiff, for the pension benefits would then be vested in the Official Receiver as part of the bankrupt's estate, and the plaintiff would still not have been released from the outstanding debt.  Furthermore, if would appear that had there been no non-alienation provision in place which prohibits the vesting of the pension benefits in the trustee in bankruptcy, the plaintiff would be theoretically much worse off than where he presently stands, because it would have meant that the entirety of his pension benefits might be subject to the claims of the trustee for the benefit of the Government as the estate’s one and only creditor, and not just 25% thereof under section 31(2) of Cap 99. 

29.In the course of submissions by counsel, a criticism has also been loosely made about the Government inequitably having the proverbial two bites of the cherry, by going down both the bankruptcy route as an unsecured creditor, and then the statutory deduction route as a secured creditor.  I take the view that this kind of analogy is inappropriate, for it is obvious that the Government as a fact did not get any bite of any cherry in the bankruptcy proceedings.  I also opine that on the facts of this case before me, the injustice of purported double jeopardy suffered by the plaintiff is not clear cut. It seems to me some justification can be made for the Government to first attempt to recover the subject debt as an unsecured creditor from the immediately realizable assets of the plaintiff, if any. In such an event, the plaintiff might well have enjoyed the advantage of having to pay less interest on the debt proved in bankruptcy running from the commencement of the bankruptcy in September 2005 under section 71(2) of Cap 6, than the greater interest that might have become claimable some 6 odd years down the road as at February 2012, when he has attained deferred retirement age.

Issue relating to withdrawal of proof of debt

30.Lastly, there is a matter of an aborted summons for the Government’s withdrawal of the proof of debt. Initially, out of extreme caution, Mr Suen indicated the defendant's intention to make an application to withdraw the proof of doubt as an unsecured creditor, so that the Government would have indubitable standing as a secured creditor, to pursue its statutory rights of deduction under section 31(2) of Cap 99, without being criticized for having logically inconsistent capacities.  

31.However, as counsel on both sides have later pointed out, since “court” is meant the High Court in its bankruptcy jurisdiction under section 2 of the Bankruptcy Ordinance, the District Court has no jurisdiction to entertain such leave, and the summons was eventually withdrawn. But I understand from Mr Suen that the defendant would then proceed to withdraw the proof of debt without leave (or the plaintiff's consent), subject only to the consent of the Official Receiver, whom I understand, has no objection to the defendant's proposed action. It appears that such an approach is unobjectionable, unless the plaintiff initiates a timely application to the High Court to contest it on grounds of prejudice. I note that under the bankruptcy subsidiary legislations, including the Bankruptcy Rules in Cap 6A, the Bankruptcy (Forms) Rules in Cap 6A, and the Proof of Debt Rules in Cap 6E, no requisite leave of the High Court has been prescribed, and a practice has emerged that a proof can simply be withdrawn with the consent of the trustee in bankruptcy.  An example of this practice can be found in Choi Lai Ming, where the proof of debt submitted on behalf of the Government as a secured creditor was found to be defective in that contrary to rule 11 of the Proof of Debts Rules (Cap 6E), no valuation was given for the securities said to be held.  Barma J said (in para. 69 thereof):-

“However, as I have already observed, that proof was defective in that it failed to comply with the relevant rule requiring the security to be valued, and the proof has not been dealt with. In these circumstances, I think that it would be open to the Government to simply withdraw the proof of debt, as Mr Griffiths indicated that it would. I can see no prejudice to any party if these were to happen, since no steps have been taken in relation to the proof."

32.Another example of such a practice can be found in Ng Wing Shing, where the Government, without giving Mr Ng any prior notice, withdrew its proof of debt after 39 months, but with the permission of the Official Receiver as trustee.  It appears that the practice is sound, notwithstanding that Yuen JA in Ng Wing Shing (para 22) had commented that had the question of withdrawal of proof of debt been contested and came before the court, the Government may not be permitted to withdraw on the facts of that case, given the possible detriment or prejudice suffered by Mr Ng.

33.As to whether in fact the proof has formally been withdrawn by the defendant notwithstanding its indication through counsel that it would be, that is not a matter which can make any difference to the end result insofar as the plaintiff's declaratory reliefs are concerned.

Conclusion and costs

34.As I have held above, the plaintiff's pension benefits cannot vest in the trustee by reason of the non alienation provision in section 28 of Cap 99, and the plaintiff has not shown to my satisfaction that there is anything which can undermine the Government's exclusive statutory right of deduction under section 31(2) of Cap 99. For these reasons I decline to make the declaratory reliefs sought by the plaintiff, and make an order that the plaintiff’s claims be dismissed with a costs order nisi in favour of the defendant, to be made absolute unless within 14 days hereof, any of the parties seeks to make an application for variations thereto.

Mr Ernest Koo, instructed by Stanley KY Ng & Co, for the plaintiff

Mr Jenkin Suen, instructed by the Department of Justice, for the defendant.