FRED LEE, trustee of the property of WONG CHI WAI SUNMY, a bankrupt v. WONG CHI WAI SUNMY

HCB 12941/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 12941 OF 2002

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REASONS FOR DECISION

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The Application

1. The trustee-in- bankruptcy, Fred Lee (“the Trustee”),  issued a summons dated 4 August 2006 (“the Application”) under section 30A of the Bankruptcy Ordinance, Cap 6, Laws of Hong Kong, to object to the automatic discharge of the bankrupt, Mr. Wong, from bankruptcy.

2. On his petition for bankruptcy filed on 28 June 2002, Mr. Wong was adjudged bankrupt when a bankruptcy order was made against him on 5 September 2002.  By the operation of law under section 30A, Mr. Wong, who has not previously been adjudged bankrupt, but for the interim orders referred to in the paragraph below to suspend the running of the period of automatic discharge, would have been discharged from bankruptcy on 5 September 2006.

3. Envisaging that the Application would not be disposed of immediately should Mr. Wong object to the Application, the Trustee, who seems to have routinely done so, also on the same date of the Application issued a summons for an interim order to prevent Mr. Wong from being automatically discharged from bankruptcy.  This resulted in the granting of an interim order by a Master on 1 September 2006 which order was further extended on 6 March 2007.  The interim orders had been de facto preventing Mr. Wong from the automatic discharge until the Application was determined on 24 September 2007.

4. After the hearing on 28 August 2007, I reserved judgment.  Before I handed down the judgment, Lam J on 14 September 2007 handed down a decision of Fred Lee, trustee of the property of Liu Man Hoo, a bankrupt v Liu Man Hoo, HCB 11719 of 2002, 14 September 2007 (unreported), which decision provides useful guidance (the relevant part of which will be discussed below) on how a trustee in bankruptcy should approach an objection to automatic discharge.  That case involves not just the same trustee but also contains similar unsatisfactory pre-bankruptcy conducts as the present case.  I consider that I should also have regard to the principles discussed in Re Liu Man Hoo. Hence, I directed the parties to appear before me for further submissions in respect of the recent decision handed down by Lam J subsequent to the hearing.

5. On 24 September 2007, the Trustee and Mr. Wong both appeared and made further submissions with reference to Re Liu Man Hoo.  After hearing submissions, I dismissed the Application and lifted the interim suspension granted by the said interim orders.  As the Trustee did not seek costs, I made no order for costs.  Here are the reasons for my decision.  Mr. Wong was acting in person and the proceedings were conducted in Cantonese throughout.  With the parties’ consent, I deliver my reasons in English.

Grounds of objection to discharge

6. In not less than 3 months before the date of Mr. Wong’s automatic discharge from bankruptcy, the Trustee on 3 June 2006 sent the section 30A(5)(a) notices to the proving creditors and informed them that he intended to object to the discharge on the ground of pre-bankruptcy unsatisfactory conduct under section 30A(4)(d).

7. No objection was raised by any proving creditors to Mr. Wong’s automatic discharge.  The Trustee, as had indicated in his notices to the proving creditors, issued the Application, relying on the pre-bankruptcy unsatisfactory conduct ground under section 30A(4)(d). 

8. The pre-bankruptcy conducts being complained of are three:

(1)	Within 3 months before his petition for bankruptcy, Mr. Wong obtained loans when he should have known that he was insolvent or that he was unable to repay (I would, for convenience, refer this conduct as the “Excessive Borrowing” conduct);
(2)	Within 2 years before the date of the presentation of petition, Mr. Wong had lost $500,000 in speculative activities and gambling.  This amount – when considered against the provable debt of about $645,000 – is rather substantial.  (This conduct will be referred to as the “speculation/gambling” conduct); and
(3)	Misrepresentation conduct.  Mr. Wong had allegedly made a representation, which did not reflect his true state of indebtedness when he obtained loans from two of the creditors, JCG Finance Company Limited (“JCG”), which is now known as Public Finance Limited and SHK Finance Limited (“SHK”).

Evidence

9. The evidence for both parties is by way of affirmation evidence.  At the hearing, Mr. Wong at the hearing referred to matters which are in the nature of evidence, and should have been dealt with in his three affirmations.  In order to be fair to both parties and to enable me to properly consider the matters raised by Mr. Wong, I therefore asked Mr. Wong if he would like to go to the witness box to affirm the matters he raised.  He agreed.  Miss Ng, solicitor for the Trustee also did not raise objection.  Hence, Mr. Wong’s opposition evidence was largely adduced only in court at the hearing. Miss Ng had not cross-examined Mr. Wong.

10. I now set out in gist the parties’ respective evidence in relation to the three types of unsatisfactory conducts referred to above.

(I) The Excessive Borrowing conduct

Trustee’s evidence

11. There is no dispute that shortly before Mr. Wong petitioned for his own bankruptcy in June 2002, he had obtained the following 5 loans from the following financial institutions:

Financial Institution	Loan Date	Loan Amount($)
Promise (HK) Co. Ltd. (“Promise”)	12/4/2001	20,000
JCG	26/4/2002	150,000
South China Financial Credit Ltd. (“South China”)	10/5/2002	20,000
United Asia Finance Ltd. (“UA”)	17/5/2002	20,000
SHK	07/6/2002	30,000

12. In respect of the loans set out in the table above, Mr. Wong was required to pay to these financial institutions a total amount of about $17,000 each month.  In addition, Mr. Wong had outstanding payments in the sum of about $200,000 due to more than 10 credit card companies.  According to the statement of affairs Mr. Wong filed with his bankruptcy Petition, he earned about $23,000 a month as a school teacher and was required to spend $24,000 as living expenses.  Miss Ng submitted that these figures show that Mr. Wong had knowingly contracted debts when he knew that he had no ability to repay.

Bankrupt’s Evidence

13. Mr. Wong’s explanation for obtaining those loans before his bankruptcy Petition is this: he started working as a school teacher in September 1997.  He got married and bought a property around the same time.  He started to run into financial difficulty when he only paid the minimum amount of his monthly credit card expenses, leading to escalation of interest.  With the credit card loans started to snowball, he and his family were frequently disturbed by threats by debt collectors engaged by credit card companies.  To make the situation worse, two of the credit card companies demanded Mr. Wong to settle the entire amount of the outstanding sums if he did not make partial payments for the amounts he owed to them.

14. Confronted by these demands, Mr. Wong therefore started to borrow heavily to make partial payments of some of his credit card loans in order to “pacify” the debt collectors.  Mr. Wong explained that although the principal loan amount from JCG was stated in the sum of $150,000, he in fact only received $60,000 because the sum of $150,000 was an aggregate sum from his previous unpaid loans from JCG. 

(II) Speculation/gambling” conduct

Trustee’s Evidence

15. The evidence relied on by the Trustee under this ground solely comes from a questionnaire issued by the Official Receiver called “ Preliminary Examination of Bankrupt”.  In both of the written answers to the questions in the questionnaire asking whether Mr. Wong had within 2 years before the date of presentation of his petition for bankruptcy lost money respectively in gambling and speculation activities, Mr. Wong had given positive answers to both questions and further wrote the amounts of  $250,000 in each of the answers.

16. Miss Ng submitted that from these answers given by Mr. Wong, it is shown that Mr. Wong had lost $500,000 in gambling and speculation – which sum represents more than 80% of the total amount of provable debts of $600,000.

Bankrupt’s evidence

17. Mr. Wong agreed that he had indeed lost money in horse racing, however the amount was not $250,000 as stated in the answer.  It was only about $100,000 odd.  As for the speculation loss, Mr. Wong said that he purchased a property as the matrimonial home.  He gave no further details as to how he lost any money from the purchase of this property.  He only said in his evidence that he had to borrow to finance the purchase of the property.

18. When I asked Mr. Wong to clarify why the amounts stated in the said questionnaire did not seem to accurately reflect the answers he gave in court, Mr. Wong explained that he was instructed to give written answers by a Mr. Ting, who had acted as his bankruptcy consultant for a fee of $2,500. 

(III)  Misrepresentation

Trustee’s Evidence

(i) JCG Loan Application

19. Mr. Wong applied for and was granted a loan from JCG on 26 April 2002.  In the loan application form on which Mr. Wong had signed, he had failed to disclose overdraft facility with HSBC and at least loans owed to at least 6 other credit card companies.

20. The disclosure is obviously incomplete.  Hence, when Mr. Wong signed on the loan application which contains the following declaration, the Trustee alleged that Mr. Wong had made misrepresentation to JCG in applying for the said loan.  The declaration reads:

“	hereby acknowledges that the Company (JCG) in making the said loan will rely on the above information which the undersigned declares to be true and also acknowledges that such information shall be the basis on which the said loan shall be made.”

(ii)  SHK Loan Application

21. Mr. Wong on 7 June 2002 applied for and was granted the loan from SHK as shown in the table above.  Similarly, Mr. Wong, in the loan application form, when providing information under the box described as “Particulars of Credit Facilities with other Financial Institutions”, only disclosed loans from JCG and Promise when in fact he had existing loans with UA, South China and HSBC as well as other credit card loans. Likewise, Mr. Wong had signed on the loan application confirming the information in the application being true, accurate and incomplete. 

Bankrupt’s Evidence

22. Mr. Wong does not dispute the above allegations.  His explanation for having provided inaccurate information was that he was an existing borrower of both JCG and SHK.  Their staff was familiar with his background and told him that he was not required to give details of his creditors.  Further, the staff had told him that the signing of the loan applications was merely a formality, which Mr. Wong believed.  Hence, Mr. Wong had taken a very causal attitude in connection with the loan applications.

Legal Principles

23. At the hearing, Miss Ng has largely relied on the recent decision of Deputy High Court Judge To in Fred Lee and Chow Wai Lan, Christine (trustee of the property of Tong Yuk Kin) v Tong Yuk Kin, HCB No. 22870 of 2002, 20 June 2007 (unreported), a decision based on pre-bankruptcy conducts of excessive borrowing as well as misrepresentation as a ground of objection to discharge by the same trustee.  In this case, the learned Judge referred to an earlier decision by Kwan J in Fred Lee and Chow Wai Lan, Christine (trustee of the property of Leung Chi Yeung) v Leung Chin Yeung, HCB No. 8779 of 2002 (and two other cases), 9 January 2006 (unreported) and expounded in detail the meaning of unsatisfactory pre-bankruptcy conduct under A30A(4)(d) in the context of the legislative objectives of section 30A.

24. Miss Ng also alluded to an earlier decision of Re Hui Hing Kwok [1993] 3 HKC 683, a decision expounding on the legislative objective behind section 30A, which lies in rehabilitation in allowing a bankrupt to resume a normal life in society.

25. After the hearing, Re Liu Man Hoo (op.cit.) was decided and the same trustee of the present case also relied on two similar pre-bankruptcy unsatisfactory conducts of excessive borrowings and misrepresentations of existing indebtedness in loan applications.  In that case, although the learned Judge held that the pre-bankruptcy conducts were unsatisfactory, he exercised his discretion in not imposing any suspension, stating that “suspension of automatic discharge should be the exception rather than the norm” (see Re Liu Man Hoo (op.cit.) at para.66)

26. I consider all these decisions are binding on me and shall therefore apply the principles expounded in them to the Application.

Discussion and Findings

27. In considering if the above conducts complained of by the Trustee constitute unsatisfactory conduct under section 30A(4)(d), I should bear in mind the dictum of Kwan J in Leung Chin Yeung (op. cit.) at paragraph 45 that:

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As mentioned earlier, a balanced view should be taken by the trustee in objecting to automatic discharge.  In a case involving excessive credit in which loans were obtained when the debtor should have known he would not be able to repay, where the bankrupt has been co-operative with the trustee and made voluntary contributions to the estate, and provided there is no other misconduct, I am inclined to think that the pre-bankruptcy conduct is not such as to warrant suspension of the running of the relevant period.”

28. In this case, it is not disputed that Mr. Wong during the 4 years of bankruptcy, has been cooperative.  Of the total amount of $645,000 proven debts, Mr. Wong had made a total contribution to the Official Receiver and the Trustee a total sum of $358,000, which is more than half of proven debts.  Hence, without the other unsatisfactory conducts of gambling/speculation and misrepresentation relied on by the Trustee, the excessive borrowing conduct may be brushed aside.  In my view, in taking a balanced view when considering the conducts of the Bankrupt, I should not look at each conducts in isolation, but examine them together.

29. According to Mr. Wong, his financial difficulty began several years before his Petition for bankruptcy when he was not able to clear his credit card debts after he had purchased the matrimonial home in 1998.  He had allowed the credit card interests to escalate to an unmanageable level.  The Trustee has not challenged Mr. Wong’s evidence despite having been given the chance to do so.  In the absence of any contrary evidence, I am inclined to accept that these are the main reasons leading to his insolvency.  Looking at the matter objectively, I cannot say that the excessive borrowings, in the circumstances, can be said to be unsatisfactory.

30. Furthermore, the Trustee, apart from looking at Mr. Wong’s loan transactions prior to his bankruptcy, has done almost no investigation regarding the circumstances leading to Mr. Wong’s insolvency or alleged conducts of speculation.  Granted Mr. Wong had lost money from his investment in property (when in fact the Trustee had adduced no evidence to contradict Mr. Wong’s evidence that the purchase of the matrimonial home was anything rather than for self-use), I respectfully echo with Lam J’s observations in Re Liu Man Hoo (op.cit.) at paragraph 50 that “one should not be too ready in condemning debts incurred for speculation. In this society, speculation and investment could be a find distinction in many cases.  In some instances, the assumption of high risk on the part of a bankrupt is actually fostered by the staff and the sales tactics of the institutional lenders who should have managed their credit risk better.”

31. Similarly to the facts of Re Liu Man Hoo (op.cit.), the Trustee in this case also did not conduct any meaningful investigations as to how Mr. Wong’s debts were incurred.  The Trustee only relied on the answers appear in the said standard questionnaire to frame his case that Mr. Wong had lost substantial amount of money in speculation and gambling. 

32. This lack of investigation by the Trustee, coupled with the contention by Mr. Wong that the written answers were not entirely accurate, I am not inclined to infer from the written answers that the cause of insolvency was due to gambling and speculation.  Mr. Wong had agreed that he had gambled on horses since he had full time employment in 1997 and that the amount he lost was only about $100,000 over a period of about 5 years, not 2 years as described in the written answer.

33. Adult gambling is a perfectly proper past-time in this society. One should not be so easily condemned if it is done within reasonable limit. There is no evidence that Mr. Wong is a habitual gambler.  However, I take the view that given the tight financial situation at the time, Mr. Wong should have exercised more control by not engaging activities with a likelihood of making his financial situation worse.  In this respect, although I accept that this gambling conduct is not as serious as the Trustee had alleged, I am satisfied that it is nonetheless an unsatisfactory conduct in the circumstances.

34. In respect with the alleged misrepresentation, like Re Liu Man Hoo (op.cit.), the Trustee had also adduced very scanty evidence regarding the circumstances under which the loan applications were filled and signed by Mr. Wong.  Given the small prints in the loan applications and with little information as to how the staffs of the financial institutions handled the applications, I am left only with the evidence of Mr. Wong that he believed what the staff had told him.  I am inclined therefore to find that Mr. Wong had no intention of deliberating misrepresenting his true financial situation to JCG and SHK when applying for the said loans or making inaccurate declarations. 

35. Having so found however, given Mr. Wong’s educational background and profession as a school teacher, I am of the view that he should have taken much greater care when he signed the forms.  I am therefore satisfied that this conduct has not been satisfactory although it is reasonably excusable.

36. To conclude, given the lack of detailed and timely investigations by the Trustee and the unchallenged evidence of Mr. Wong, I am unable to accept that the Trustee has satisfied me that the excessive borrowing and loss of money in speculation being unsatisfactory conduct.  I however find that the conducts of gambling and misrepresentation have been - when viewed objectively - unsatisfactory.

Exercise of discretion

37. Having concluded that some aspects Mr. Wong’s conducts have not been satisfactory, I should carefully consider whether I ought to exercise my discretion to suspend Mr. Wong from discharge of bankruptcy, and should I so find, to decide the appropriate period of suspension.

38.  In considering how my discretion should be exercised, I shall bear in mind the principles elucidated in the cases referred to above, in particularly the very powerful observations of Lam J in Re Liu Man Hoo (op. cit.) at paragraph 66 that the court should take an overall view of the matter in the exercise of discretion and that suspension of automatic discharge should only be applied to conducts of exceptional gravity (See paras. 65 to 68 in Re Liu Man Hoo).

39. Mr. Wong’s said pre-bankruptcy unsatisfactory conducts should be balanced against the post-bankruptcy conducts as well as other factors such as the manner the Trustee conducts the investigations and all the circumstances of the case.  The unsatisfactory conducts that I have found proved, in my view, are not grave.  Further, no objections were raised by any proving creditors against Mr. Wong’s discharge from bankruptcy.  Mr. Wong has cooperated with the Trustee in the administration of the estate.  Further, from the amounts of contributions he had made to the bankruptcy estate, I am satisfied that Mr. Wong had done his best to contribute to the bankrupt estate without abusing the bankruptcy regime as a debt-clearing house.  Last but not the least, by virtue of the interim orders, Mr. Wong prior to the disposal of this case, had effectively been prevented from discharge for about 12 months, which must have caused him much distress.

40. After having considered all the evidence and balanced the interests of Mr. Wong, that of the commercial world as well as the moral values behind section 30A, I consider that it is not fair to exercise my discretion to suspend any period of automatic discharge.

Discharge of Interim Orders

41. Upon dismissal of the Application, I also lifted the suspension imposed by the two interim orders granted by Masters and ordered that it should take retrospective effect, adopting the reasoning (with which I agree) in Official Receiver v Chan Kwok Keung, HCB 20772 of 2002, Master Au Yeung (as she then was) 5 July 2007 (unreported).