RE LUK TSUN YIN

HCB1336/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO.1336 OF 1997

------------

------------

-----------------------

J U D G M E N T

-----------------------

1. This is an application by Luk Tsun Yin ("the Bankrupt"), by way of motion that the order of adjudication and the receiving order made against him be annulled and rescinded.

2. On 19 May 1997, the Petitioning Creditor obtained a default judgment against the Bankrupt. The Petitioning Creditor was and is a securities broker and dealer. It was alleged that the Bankrupt was a client of the Petitioning Creditor and pursuant to agreements entered into between the Petitioning Creditor and the Bankrupt, certain transactions in securities had been carried out on his behalf.

3. At the relevant time, i.e. when the Bankrupt allegedly entered into those agreements with the Petitioning Creditor in October 1996, the Bankrupt was only 18 years old. His father ("Mr Luk") used to be a securities broker and dealer but was made a bankrupt in 1992. Since then, of course, he has not been able to trade on his own account and his stockbroker licence was revoked in 1993. It is also in evidence that Mr Luk has a criminal record for using false instruments to open accounts with security houses and had done so in the name of his wife.

4. The Bankrupt was introduced to the Petitioning Creditor by his father. The Bankrupt has little knowledge of English and effectively did his father's bidding. The Bankrupt's position is that he disputes any liability to the Petitioning Creditor : none of the documents he was signing was ever explained to him. Effectively he is saying that Mr Luk was in fact the real contracting party.

5. It is the Bankrupt's case that he knew nothing of the proceedings against him which culminated in the default judgment. He was never served with any documentation prior to the entering of the default judgment. It would appear that the Petitioning Creditor effected service of the documents according to the rules. However, there is evidence that the documents were intercepted by Mr Luk. Prima facie, the Bankrupt's explanation is credible but it is not a matter that I need to go into further for present purposes.

6. As regards the bankruptcy documentation, whilst he apparently realized that there were some proceedings against him, he was assured by Mr Luk that Mr Luk would sort it out. Given the relationship between them and the Bankrupt's age, the Bankrupt's explanation is entirely plausible.

7. The bankruptcy petition was in fact served upon the Bankrupt at a meeting at the office of the Petitioning Creditor's solicitors arranged by Mr Luk who accompanied the Bankrupt and was present throughout. The Bankrupt said that he was misled as to the effect and importance of this documentation as a result of the conduct of his father. This is the explanation he gave as to why he did not attend the hearings at which the receiving and adjudication orders were made against him respectively on 15 April 1998 and 22 June 1998.

8. So far as the Petitioning Creditor is concerned, although it lodged the petition and obtained the orders against the Bankrupt, it is not opposing the present application. The reason behind this is its own commercial interests : it takes the view that it no longer makes commercial sense for the Petitioning Creditor to be spending more money in this matter.

9. I was referred to two English authorities. The first is Henwood v. Customs and Excise [1998] BPIR 339. Although this concerned leave to appeal against the refusal of Millett J to annul a bankruptcy order that had been made, the principles stated are relevant. Leave was granted on the basis that the applicant had arguable grounds of appeal : first, the whole of the petitioner's claim was the subject of a dispute on substantial grounds. Secondly, in that case, the applicant's reason for failing to appear at the hearing was that although he had instructed solicitors to appear to represent him, but due to a mix up, the solicitors failed to appear.

10. The next case isFitch v. Official Receiver [1996] 1 WLR 242. That case dealt with the powers of the court to rescind bankruptcy orders under section 375(1) of the Insolvency Act 1986. The bankrupt's application for rescission was not opposed by the petitioning creditor. The judge had held that the change in attitude did not derive from any change in the underlying circumstances, but merely from a reappraisal by the petitioning creditor of its commercial interests. The application to rescind was refused, the judge taking a view that it was a deception to which the court should not be a party. On appeal which was allowed, the court held that the fact that the underlying circumstances which led the creditors to support the rescission of the bankrupty orders had been known at the time the orders were made did not prevent the creditors' change of attitude from being new and relevant. Further, that there was no evidence from which the judge could conclude that both debtors would embark on a course of deception if the bankruptcy orders were rescinded. The court exercised the discretion afresh and allowed the rescission. It is apparent from the Court of Appeal's decision that the court's power to review and if thought fit, to rescind a bankruptcy order, is virtually unlimited.

11. In the present case, the Petitioning Creditor has also changed its mind. That is certainly a relevant circumstance to be taken into account when evaluating whether or not the court should exercise its discretion to annul the receiving order and the adjudication order pursuant to section 33 of the Bankruptcy Ordinance, and to rescind such orders pursuant to section 98.

12. The old section 33 of the Bankruptcy Ordinance which applies to the present case provides as follows :

"(1) Where in the opinion of the court a debtor ought not to have been adjudged bankrupt, or where it is proved to the satisfaction of the court that the debts of the bankrupt are paid in full, the court may, on the application of any person interested, by order annul the adjudication."

The Bankrupt relies on the first limb of that sub-clause. Essentially it comes to this : he ought never to have been adjudicated bankrupt because the debt underlying the default judgment is disputed on bona fide grounds and there are good reasons for allowing him to apply to set aside the default judgment out of time. Certainly, the circumstances regarding the service of proceedings on him leading to the default judgment are highly unusual. Not only has he made out a strong prima facie case that the underlying debt is substantially disputed, he has given a plausible explanation of the circumstances relating to his non-appearance at the hearing at which the default judgment was made as well as at the bankruptcy hearings that resulted in the making of the receiving and adjudication orders.

13. I have come to the conclusion that in all the circumstances, it would be appropriate for the court to exercise its discretion under section 33 to annul the receiving and adjudication orders and to rescind them pursuant to section 98 of the Bankruptcy Ordinance. If and so far as may be necessary, I will also grant leave to set aside the default judgment out of time.

14. The petition should also be dismissed and I so order.