HEALTHY WHARF LTD v. THE OFFICIAL RECEIVER AND TRUSTEE OF THE PROPERTY OF LEUNG YAT TUNG, A BANKRUPT

HCB 2019/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 2019 OF 2000

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D E C I S I O N

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1.  This is an application by the petitioning creditor (“Creditor”), made under s 83 of the Bankruptcy Ordinance (“Ordinance”) and rule 24 of the applicable Proof of Debt Rules (“Rules”), for the Court to reverse or vary the decision of the Official Receiver (“OR”), whereby the OR rejected the Creditor’s proof of debt in so far as the Creditor’s costs of the petition are concerned (as particularized below).

2.  By the time of the hearing and as a result of the correspondence between the parties, the issue in dispute was confined to the OR’s decision to reject as a provable debt the Creditor’s taxed costs incurred in the presentation of the petition (“Petition Costs”) for the bankruptcy of Leung Yat Tung (“Bankrupt”).  Other than the Petition Costs, the Creditor had additionally incurred: (1) costs as a result of the Bankrupt’s application for an interim order under ss 20 and 20A of the Ordinance, which application was dismissed by the Court, with costs to the Creditor on an indemnity basis by an order made on 1 March 2001 (“Interim Order Costs”); and (2) costs incurred in the Bankrupt’s appeal against the bankruptcy order and against the dismissal of the interim order application, which appeal was dismissed on 19 April 2001 with costs to be paid by the Bankrupt (“Appeal Costs”).  The OR has accepted that the Interim Order Costs and the Appeal Costs are provable debts, as distinct from the Petition Costs.

3.  The Petition Costs in this case are in the region of $249,000.  The bankruptcy order was made on 1 March 2001, on the basis of the Creditor’s statutory demand for a judgment debt due from the Bankrupt to the Creditor in HCA 1125/2005, in the region of $3.6 million, with interest and costs of the action.  Those sums form part of the Creditor’s proof of debt filed on 28 May 2001(“Proof”), and the OR accepted the Proof in respect of the underlying judgment debt.

4.  The basis of the OR’s rejection of the Petition Costs from the Proof is that such costs are the Creditor’s costs of the petition for bankruptcy, and as such, they are to be paid under s 37 of the Ordinance as part of the costs and charges of the bankruptcy, as distinct from other debts proved in the bankruptcy which are to be paid pari passu out of the assets of the bankrupt, after the payment of costs and other priority debts under s 38 of the Ordinance.

5.  The Creditor objects to the rejection of the Petition Costs, on the basis that they fall within the definition of “debts provable in bankruptcy” under s 34 of the Ordinance, and should be provable for that reason.  Section 34 (3) provides that “all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the date of the bankruptcy order, or to which he may become subject before the discharge by reason of any obligation incurred before the date of the bankruptcy order … shall be deemed to be debts provable in bankruptcy”.

6.  It was argued that if the Creditor is not allowed to prove for the costs it incurred in presenting the petition for bankruptcy, which led to the making of the bankruptcy order and the administration and distribution of the assets of the Bankrupt amongst his creditors, the Creditor would be unfairly prejudiced.  It would be deprived of the right to vote in accordance with the full amount of its proved debt, and of the right to receive interest from any surplus of assets remaining after the payment of debts which are proved in bankruptcy.  That, it was argued, could not have been the intention of the Ordinance. 

7.  As the OR’s decision to reject the Petition Costs as a provable debt is a decision on a point of law, rather than an exercise of discretion, the principles set out in Chung Kau HCB 581/2003, 5 May 2003, that the Court should not interfere with the decision of the trustee unless such decision was “perverse or clearly wrong”, do not apply.

8.  Neither party has been able to identify any authority which is directly on the point of whether a petitioning creditor’s costs of the bankruptcy petition can be proved.  The case of Lo Shing Kin v Sy Chin Mong Stephen (2014) 717 HKCFAR 903 relied on by the Creditor does not assist the present case, since the decision of the Court of Final Appeal concerns the costs of separate legal proceedings commenced before the petition for bankruptcy, and whether such costs are debts under liabilities incurred before the date of the bankruptcy order, or to which the bankrupt became subject at the date of the bankruptcy order, rather than the costs of the bankruptcy proceedings themselves.  Even if the Petition Costs are debts to which the Bankrupt became subject by reason of an obligation incurred under the Petition before the date of the bankruptcy order, the issue remains whether these Petition Costs are costs and expenses provided for, and to be dealt with, under s 38 of the Ordinance, and whether they can be proved.

9.  The OR relies on s 37 of the Ordinance, which provides that after payment of the expenses properly incurred in preserving, getting in or realizing any of the assets of the bankrupt, the assets remaining “shall” (subject to any order of the court) “first be liable to” various payments, which shall be made in a designated order of priority.  These payments include, firstly, the prescribed fees, charges and percentages payable to the OR, and costs, charges and expenses incurred or authorized by the OR (under s 37 (1) (a)), and then, secondly, “the taxed costs of the petition, including the taxed costs of any person appearing at the hearing of the petition whose costs are allowed by the court but excluding the interest on such costs” (under s 37 (1) (b)).  According to the OR, the Petition Costs are clearly costs referred to in s 37 (1) (b), which are costs to be paid in priority to other expenses and debts.

10.  The OR further highlights the fact that the Petition Costs were ordered to be paid “out of the estate of the debtor/Bankrupt”, whereas, by contrast, the Interim Order Costs were ordered to be paid by the debtor/Bankrupt, on indemnity basis.  The Appeal Costs were simply ordered to be paid, without specifying whether they were to be paid out of the estate, or to be paid by the Bankrupt.

11.  The OR seeks to rely on the decision of the English court in Cooke v Dunbar Assets plc [2016] EWHC 1888, and the passage of the judgment of the learned deputy judge who observed, as follows:

“ … the structure of the Insolvency Act is difficult to reconcile with the notion that the costs of insolvency proceedings constitute a contingent debt or liability for the purposes of being provable. Such a notion would not be harmonious with the priority of debts established by s 328; the expenses of the bankruptcy are afforded priority over other debts, preferential or otherwise. If the costs of the bankruptcy proceedings themselves, including any appeal, are provable in the bankruptcy, then the effect of s 328 in conjunction with rule 6.224 would be to deal with such costs twice, and differently, ranking in priority as an expense, and then again much lower in the order as a non-preferential debt.”

12.  On the behalf of the Creditor, Counsel argued that the above observations were made obiter, and in the context of the English Insolvency Act 1986 (“1986 Act”), which is a regime different to the one under the Ordinance based on the earlier English Insolvency Act.  Counsel further highlights the fact that rule 12.2 of the Insolvency Rules, made under the 1986 Act (“Rule 12.2”), expressly provides that “all fees, costs, charges and other expenses incurred” in the course of the bankruptcy proceedings “are to be regarded as expenses” of the bankruptcy, and that Rule 12.2 has no equivalent provision in Hong Kong.

13.  I accept that the provisions of the Ordinance are not identical to those of the 1986 Act.  However, I am not satisfied that overall, there is any difference in the fundamental concepts or objectives of the bankruptcy regime, provided for in the Ordinance and in the 1986 Act.  These must be for the gathering in of the property of the bankrupt through a collective process, to enable the assets to be distributed among and shared rateably by the creditors in proportion to the debts which they are owed, in the most equitable way, in return for freeing the bankrupt from the accumulated burden of his debts and giving him the chance to make a fresh start.  One of the basic principles and aims of the bankruptcy regime is the payment of debts pari passu amongst the unsecured and non-preferential creditors.

14.  I am unable to see how the absence of an equivalent of Rule 12.2 would or should make the overall scheme of the Ordinance different to that of the 1986 Act.  By expressly providing that “all fees, costs, charges and other expenses” incurred in the course of the bankruptcy proceedings are to be regarded as “expenses” of the bankruptcy, Rule 12.2 has the effect of making such costs payable out of the bankrupt’s estate, in priority, as provided for under the “general rule as to priority” under the relevant rule of the English Act which sets out the expenses and other costs incurred or chargeable by the trustee in bankruptcy.  The existence of Rule 12.2 does not answer the question of whether such expenses and costs can be a provable debt.

15.  Section 37 of the Ordinance already makes express and clear provision that the taxed costs of the bankruptcy petition are to be paid first, from the assets of the bankrupt, as one item of the costs and charges, by way of priority.

16.  Under the Ordinance, s 38 (1) sets out, after the costs and expenses referred to in s 37, the debts to be paid “in priority to all other debts”, including wages, salaries and other payments payable to an employee under the Employment Ordinance.  Under s 38 (3), these debts “shall rank equally among themselves”, shall be paid in full unless the property of the bankrupt is insufficient to meet them, and under s 38 (4), these debts “shall be discharged forthwith so far as the property of the debtor is sufficient to meet them”, but this is expressly made subject to the provisions of s 37, and to the retention of such sums as may be necessary for the costs of the administration.

17.  The priority provisions of the Ordinance expressly provide, in s 38 (8), for “all debts proved in the bankruptcy” to be paid pari passu.  Only if there is any surplus after payment of the debts, will interest be paid from the surplus “on all debts proved in the bankruptcy”.

18.  The OR pointed out that rule 79 of the applicable Bankruptcy Rules provides, consistently with s 37, that where a bankruptcy order is made on a creditor’s petition, the costs of the petitioning creditor shall be taxed and paid out of the estate. 

19.  Having reviewed the relevant provisions of the Ordinance referred to above, and after considering the submissions made on behalf of both parties, I cannot agree that the Creditor is unfairly prejudiced by reason of its inability to prove for the Petition Costs.  It is clear that these costs are envisaged by and provided in the Ordinance to be paid, as a matter of priority, out of the estate of the Bankrupt, before the payment of preferential and other proved debts.  That is the advantage conferred on and enjoyed by the petitioning Creditor.  It cannot be said that its troubles of filing for the bankruptcy of the debtor, eventually permitting the creditors to share collectively in the recovery of their debts, are not compensated.  The costs incurred by the petitioning Creditor, when they are taxed, are recovered in full under s 37 from the assets of the bankrupt, before distribution to other creditors, who (in contrast to the Creditor) have to compete for payment and recovery, on pari passu basis, to the extent that their debts are unsecured. 

20.  Counsel for the Creditor argued that any contradiction between allowing the Creditor’s costs as an expense, and as a provable non-preferential debt, as referred to in the judgment in Cooke v Dunbar, can be reconciled to the extent that the Creditor should be permitted to prove for any of its unpaid costs.  In reality, it is difficult to envisage how such a situation can arise whereby a petitioning creditor would have to compete with the other creditors for the balance of any costs which could not be paid in full.  If there are sufficient assets, the Petition Costs would be paid first, in full, before the claims of other creditors are considered for distribution.  If the petitioning Creditor cannot be paid in full first, if and when other assets are collected, the petitioning Creditor and the OR will still be entitled to payment of any balance of their unpaid costs from such assets, before the claims of the other creditors are considered and paid on pari passu basis. 

21.  Since the Creditor is to be paid the Petition Costs in full, it is not unjust that it should not be entitled to a vote on matters relating to the administration of the bankruptcy, in respect of the Petition Costs.  The right to vote should be reserved for the creditors who will be competing for payment on pari passu basis.  The Creditor in this case will still be entitled to have its vote on the basis of and in accordance with the part of the debt it proves for the underlying judgment sum and, as now accepted by the OR, for the Interim Order Costs and the Appeal Costs which are to be paid by the debtor/Bankrupt.

22.  For all the above reasons, I dismiss the Creditor’s application, with costs to be paid to the OR.