FRED LEE, TRUSTEE OF THE PROPERTY OF PANG LAI FAI WILLY, A BANKRUPT v. PANG LAI FAI WILLY

HCB 9850/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 9850 OF 2002

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REASONS FOR DECISION

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This hearing

1.  This hearing is on the issue of costs between the trustee and the estate pursuant to my order made on 17 September 2007 when the trustee withdrew his application objecting discharge of the bankrupt. The bankrupt asked for no costs against the trustee.  I made no order as to costs between the bankrupt and the trustee.  As to the question of whether the trustee’s costs for this application should be paid out of the estate, I adjourned the matter to this hearing, giving an opportunity to the trustee to make submissions on this issue.

2.  This is a rather unusual course for this court, on its own motion, to take concerning the costs of the trustee in automatic discharge proceedings.  I shall now set out the background reasons for so doing.  All the following cases are concerning the same trustee as this case.

The background

3.  About 18 months ago, the court received a flood of applications whereby the trustee opposed the discharge of the bankrupts under section 30A of the Bankruptcy Ordinance.  This is also the background in the judgment paragraph 5 of Lee Fred (Trustee in Bankruptcy of the Property of Leung Chin Yeung) v Leung Chin Yeung & Ors [2007] 1 HKC 164.  The usual grounds for opposition were: excessive borrowing before bankruptcy, misrepresentations by the bankrupt in the applications to the financial institutions for loans or credit cards and failing to submit timely the annual financial statement.  Many of those cases subsequently came to an agreement to settle the matter by way of conditional discharge of the bankruptcy, the conditions being that the bankrupt would continue to pay monthly contributions to the estate for a certain period of time after the end of 4 years’ bankruptcy period and to pay the costs of the trustee.  It was against those conditions that the trustee agreed not to proceed with his application to oppose the discharge of the bankruptcy.  Some bankrupts opposed the trustee’s applications, saying that they had been very cooperative with the trustee throughout the whole period of bankruptcy and that they were forced to make more contributions to the estate and to pay the trustee’s costs.  For example, see HCB 13452 of 2002. In this case, the trustee has withdrawn his summons against the bankrupt, who insisted to pursue his complaints of, inter alia, the above allegations against the trustee pursuant to section 84 of the Bankruptcy Ordinance. This matter has been adjourned for court’s consideration of transferring it to the Bankruptcy Judge for a hearing.

4.  One of those cases went before Madam Justice Kwan on 20 December 2006 and the judgment was delivered on 9 January 2007. This case was reported as Lee Fred (Trustee in Bankruptcy of the Property of Leung Chin Yeung) v Leung Chin Yeung & Ors [2007] 1 HKC 164. Madam Justice Kwan held that an order of continued contribution to the estate as a condition to discharge should be made with restraint and circumspection [184C].  She also held that the trustee should not act too readily in deciding to object to automatic discharge [183H].  She ruled that the trustee has failed to discharge his quasi-judicial obligation properly and he was not entitled to recover his costs of and occasioned by the hearing out the bankrupt’s estate[191E].

5.  In another case of Fred Lee v Tong Yuk Kin unreported HCB22870 of 2002, Deputy Judge To agreed with Kwan J.’s ruling that the application for suspension should not be used as a means of extracting more contribution from the bankrupt for distribution to his creditors. [para.22 of the judgment].

6.  In another case of Fred Lee v Liu Man Hoo unreported HCB11719 of 2002, Lam J. held that the trustee should make necessary investigation before making decision whether it is appropriate to object discharge of bankruptcy. [para.13 &16].  Lam J. also held that the trustee had to give the court the relevant information the circumstances under which the debts were incurred for the court to form a balanced view. [para.51]  The Judge finally held that the trust had failed to make the necessary investigation in that the trustee had failed to interview the bankrupt regarding his pre-bankruptcy conducts before he decided to raise an objection based on section 30A(4)(d). [para.52]  In the end he dismissed the trustee’s application.  Parties had reserved the argument on the issue of costs. Lam J. had made an order nisi that the bankrupt’s costs be paid out of the estate.

7.  In a case of Fred Lee and Chow Wai Lan v Lai Wai Hung unreported HCB14977 of 2002, having heard the evidence, I ruled that the trustees had failed to make reasonable investigation before taking out the application to object discharge of bankruptcy.  Following the decision of Madam Justice Kwan in the above case, I disallowed the costs of the trustees to be paid out of the estate.  Having heard the argument of counsel for the bankrupt, who asked for costs of the proceedings, I also held that since the creditors did not give instructions to the trustees to take out the application and the trustees took it out on their own initiative, I ordered that the trustees had to pay the bankrupt’s costs personally.

8.  It is against the above background that I consider the trustee’s costs on my own motion.  Now I shall consider the facts of this case.

Merits of this case

9.  The court made a bankruptcy order on 12 September 2002 on the bankrupt’s petition.  The bankrupt should be discharged of bankruptcy under section 30A of the Bankruptcy Ordinance on 12 September 2006 were it not for this application of the trustee.

10.  The trustee took out this application on his own initiative.  None of the creditors of the bankrupt had informed him that they intended to object to the bankrupt’s discharge. [Trustee’s 1^st affirmation para 6]

11.  Upon the trustee’s application, on 8 September 2006 the court made an interim order suspending the running of the relevant period under section 30A(2)(a) of the Bankruptcy Ordinance pending the determination of the trustee’s application.  In effect, the bankruptcy period has been prolonged for more than one year.

12.  The trustee relied on 2 grounds to support his application: (a) that the bankrupt should not have obtained the loans from UA in April 2002 as he was aware that he was unable to repay the loan; and (b) the bankrupt misrepresented his financial positions to the Official Receiver and two banks because he had failed to disclose all his loans to the Official Receiver in a questionnaire and to JCG and Asia Commercial Bank for his applications for the bank loans from these 2 banks. [Trustee’s 1^st affirmation para 27-35]

13.  In the questionnaire to the OR, the trustee complained that the bankrupt had omitted one loan of HSBC.  In his application for loan of $300,000 from JCG, the bankrupt had failed to disclose all other loans and credit facilities at that time and the 1^st mortgage of his property.  For the application to Asia Commercial Bank for loan, not only did the bankrupt fail to disclose all his credit cards and loans, he had also misrepresented to the bank that he had no instalment loan and no overdraft.

14.  I ask Miss Ng, who acts for the trustee, that when the trustee had the information about the bankrupt, did the trustee make any investigation with the bankrupt so that the trustee might consider the explanations that the bankrupt might have before deciding to take out the present application.  She tells me that the trustee did not do so.  The trustee kept the information on papers and waited near the end of the bankruptcy period and took out the application to object the discharge of bankruptcy.  Nor did the trustee make any enquiry with the financial institutions involved throughout. This is similar to the case of Lai Wai Hung.

Bankrupt’s evidence

15.  The bankrupt has filed his affirmation on 30 April 2007 in opposition to the trustee’s application objecting to his discharge of bankruptcy.  The bankrupt explained that the UA loan was pre-approved by the bank and he was badly in need of money to repay his debts and he had not thought of bankruptcy at the time of the application.  [Affirmation para.6]

16.  In his affirmation, the bankrupt denied having the intention of making misrepresentation to the OR and the banks.  He did not bring all his documents to the OR when he filled in the questionnaire.  He could not remember the HSBC loan made in March 2002.  He had no intention of hiding as he had disclosed all his information, including the HSBC loan in the statement of affairs.  This the trustee does not dispute. [Affirmation para.7]

17.  The JCG loan was made as a renewal of the previous loan, which was made since 1996.  The bankrupt took the tax assessment statements, monthly salary statements and bankbook to the staff of JCG, who filled in the application form for him.  He had no intention of hiding other loans from JCG. In his monthly salary statements, it showed the Home Finance Allowance (Mortgage) with monthly payment to the Bank of America.  He admitted that he signed the application form filled out by the staff of JCG without confirming all the details.  But he had no intention of hiding the information from JCG. [Affirmation para.8]

18.  The Asia Commercial Bank (Asia) credit card application was made in one of the promotional booths in Tsim Sha Tsui Branch. The bank representatives filled out the form for him.  Knowing that he was a civil servant, the bank representative told him that he did not require detailed financial information and the bankrupt should give the information of the credit cards he was carrying at that time.  The number “3” for the credit cards was filled in by the bank representative, who also told him that the bank would request for further information if required later on. [Affirmation para.9]

19.  The trustee has given no evidence to rebut the bankrupt’s evidence above.

Trustee’s arguments

20.  Miss Ng submits that the trustee was correct to take out the present application because of the following reasons: (1) he had considered the information before he took out the present application and the bankrupt was heavily in debt when he applied for the UA loan; (2) also, from the application forms for the loan and the credit card, it was clear that the bankrupt had not fully disclosed all the debts and credit facilities to the banks and (3) there were no decided cases such as those decided by Kwan J. and Lam J to guide the trustee’s conduct.

21.  As to the reasons (1) and (2), now the trustee has withdrawn his application. The bankrupt has given evidence in affirmation, in which the bankrupt argued that he did not have the intention of over-borrowing immediately prior to his petition for bankruptcy and that he did not have the intention of making misrepresentation to the Official Receiver or to the banks.  The trustee has not filed any evidence to refute the bankrupt’s evidence.  This is simply because the trustee has not done any investigation with the bankrupt, the Official Receiver or the banks involved.

22.  As to reason (3) that there was no case to guide the trustee in his exercise of his discretion to object the bankruptcy, I do not accept this argument because the proper approach in respect of exercise of discretion to suspend discharge has been clearly set out by Madam Justice Le Pichon in the case of Re: Hui Hing Kwok v The Official Receiver [1999] 3 HKC 683.  In this case, the learned Judge decided that the burden was on the Official Receiver to show that the bankrupt was intending to cheat the bank and the Official Receiver had failed to discharge this burden.  Even for the offence that the bankrupt had committed, namely obtaining of credit in excess of $100 without first informing that person that he was an undischarged bankrupt, for which the bankrupt was sentenced 6 months’ suspended sentence, the learned Judge took the view that since the intention of the legislation was to rehabilitate the bankrupt and that the bankrupt had been adequate punished for his failing, she declined to exercise the discretion to suspend the discharge.  I take the view that Kwan J.’s  and Lam J.’s  decisions are not setting out the guidelines for the trustee’s conduct.  It is fundamental for the trustee to act reasonably and with common sense. It does not require any decided case to tell the trustee that he should not take out application to object discharge bankrupt lightly, particularly in light of Le Pichon J’s decision mentioned above.  Nor does it require any decided case to tell the trustee that he should make further investigation as soon as he has identified defaults committed by the bankrupt, giving the bankrupt the chance to explain his conducts and to make enquiry with the bank staff involved in order to verify the explanations given by the bankrupt. Kwan J’s and Lam J’s judgments only pointed out the mistakes and shortcomings of the trustee.

Conclusions

23.  I take the view that had the trustee made the proper investigations into the matter as soon as he had discovered the information on which he suspected that the bankrupt had made misrepresentations to the OR and the banks, he would be able to obtain the explanation from the bank.  He could then verify the bankrupt’s explanation with the OR and the bank staff concerned.  He would be in a better to assess whether he should take out an application against the bankrupt objecting to his discharge of bankruptcy.

24.  In the recent Decision of Lam J. in Fred Lee, trustee of the property of Liu Man Hoo, a bankrupt v Liu Man Hoo unreported HCB 11719/2002, Lam J. agreed with the decision of Kwan J. in Lee Fred v Leung Chin Yeung [2007] 1 HKC 164 that an application to object to discharge is a serious matter and it should not be embarked upon lightly. [para.10]  The trustee should consider all relevant circumstances to see whether there is at least an arguable case that the court will order suspension of the discharge against the bankrupt. [para.12]  The trustee should make necessary investigation before making decision whether it is appropriate to object discharge of bankruptcy. [para.13 & para.16]

25.  It can be seen quite obviously that the trustee in this application has failed to discharged his duties of making proper or reasonable investigations before he took out his application to object the bankrupt’s discharge of bankruptcy.  In the circumstances, I followed the decisions of Kwan J. in Leung Chin Yeung’s case mentioned above as I did in Lai Wai Hung’s case and I disallow the trustee’s costs, including the costs for today’s hearing, from the estate.