RE LO SHIU MUI

HCB 10596/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 10596 OF 2007

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J U D G M E N T

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1.  This was an application by Ms Lo Shiu Mui for the annulment of the bankruptcy order made against her on 26 March 2008 pursuant to section 33(1)(b) of the Bankruptcy Ordinance (Cap. 6).  Ms Lo previously made an unsuccessful application pursuant to section 30B of the Ordinance seeking an early discharge from her bankruptcy (see Re Lo Shiu Mui [2009] 4 HKLRD 713).

2.  The background to Ms Lo’s bankruptcy is set out in my judgment in respect of her earlier application, and can be summarised as follows:-

(1)     On 1 March 1995, Ms Lo granted an all monies legal charge and mortgage over a property owned by her to the Industrial & Commercial Bank of China (Asia) Ltd (“the Bank”), to secure the debts of a company called United China International Limited (“United China”), of which she was a director.  According to Ms Lo, United China was in fact owned and run by her then husband, and she was not involved in its management.

(2)     United China failed to repay its indebtedness to the Bank, resulting in the Bank commencing proceedings against United China and Ms Lo, in which the Bank obtained a judgment for a little over HK$7.6 million against both United China and Ms Lo in September 1999.  Ms Lo did not dispute her liability to the bank in those proceedings.

(3)     In October 2004, the Bank sold the mortgaged property for some HK$4.77 million, leaving an amount of HK$3 million odd outstanding under the judgment.

(4)     On 17 December 2007, the Bank presented a bankruptcy petition against Ms Lo, relying on the unpaid balance of the judgment debt, which, with accrued interest, then stood at a little over $3.8 million.

(5)     On 26 March 2008, Master Levy made a bankruptcy order against Ms Lo, who had not appeared in response to the petition.

(6)     Ms Lo says that she was unaware of the bankruptcy petition until shortly after the bankruptcy order was made.

(7)     On becoming aware of the bankruptcy order, Ms Lo contacted the Bank’s solicitors.  Thereafter, with the help of her employer Eversense International Limited (“Eversense”), a company of which she was a 50% shareholder and a former director, a settlement was reached with the Bank whereby the Bank agreed to accept HK$356,000 from Eversense in full discharge of her liability to the Bank, inclusive of its costs in connection with the bankruptcy proceedings.

3.  On 24 April 2008, The Bank’s solicitors wrote to the Official Receiver informing them of the settlement and enquiring whether the Official Receiver would have any objection to an intended application by Ms Lo for an annulment of her bankruptcy in the light of the settlement.  The Official Receiver’s response was that it was not possible to obtain an annulment on the basis of a settlement or accord and satisfaction where there had not been full payment of the bankrupt’s debts (Re Lo Cheuk Chiu (unreported, CFI, HCB 8036/2006, 25 January 2008).

4.  Ms Lo then decided to make an application for early discharge from her bankruptcy pursuant to section 30B of the Ordinance, rather than seek an annulment of her bankruptcy pursuant to section 33(1)(b).  Unfortunately, that application was unsuccessful, for the reasons explained in my judgment in relation to it.

5.  The present position is that the Bank has made it clear that it does not regard itself as a creditor of Ms Lo any longer, and has not sought to prove in her bankruptcy.  No other creditors have sought to prove in the bankruptcy, and none have appeared in respect of this application, which was duly advertised.

6.  Ms Lo’s present application is for an annulment of her bankruptcy pursuant to section 33(1)(b) of the Ordinance.  That section provides as follows:-

“(1)   The court may annul a bankruptcy order if it at any time appears to the court that –

         …

(b)     to the extent required by the rules, the provable debts and the expenses of the bankruptcy have all, since the making of the order been either paid or secured to the satisfaction of the court.”

11.  The key question in the present case is whether the word “paid” appearing in section 33(1)(b) of the Ordinance should be construed as meaning fully paid, or whether where a debt has been settled without full payment of it, but in circumstances in which the debt is extinguished, it can properly be regarded as having been “paid”.

12.  In my view, it is necessary to have regard to the history of the development of the statutory provision in order to resolve this question.  Prior to its amendment in 1996, section 33(1) of the Bankruptcy Ordinance was (so far as material) in the following terms:-

“(1)   … 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.”

13.  The old section 33(1) was identical to section 29(1) of the Bankruptcy Act 1914 in the United Kingdom, which in turn was identical to section 35 of the Bankruptcy Act 1883.  That provision was considered by the English Court of Appeal in Re Keet [1905] 2 KB 666.  In Re Keet, most of the bankrupt’s creditors who had proved in his bankruptcy executed a deed releasing him from liability to them, without any consideration having been provided.  The rest of his creditors were paid in full.  The bankrupt then applied for an annulment of his bankruptcy.  The Court of Appeal, reversing the court below, held that he was not entitled to an annulment, as there had been no payment “in full” of his debts within the meaning of section 35 of the 1883 Act.

14.  In that case, Vaughan Williams LJ said (at pp. 674 to 675):-

“… I think that in practice [the section] has always been construed as meaning that the condition of annulment is payment in full of all debts which have been admitted to proof, unless the proof has been expunged on the ground that it never ought to have been admitted.

…to construe the section in the way contended for on behalf of the bankrupt would undoubtedly open the door to arrangements with creditors under which the Court, in ignorance of the true facts, might in the exercise of its discretion … order annulment of a bankruptcy which the Court, if it had known the circumstances under which the releases were obtained, would have refused to annul.

… I think that the Court ought to read “debts” in s. 35 as meaning debts admitted to proof, because to hold “debts” to mean “provable debts” would make the payment in full by a bankrupt of debts for advances by relations and friends, who have not proved conditionally or otherwise, or in any way intervened in the bankruptcy, a condition precedent to the power of the Court to annul.”

15.  Stirling LJ had this to say (at p. 677):-

“The language of the Act, interpreted according to its natural meaning, appears to me to require a payment in full, a payment of money, something which in an action of law could, under the old practice, have been pleaded as a payment.  If these releases had been given in consideration of a small payment, in my judgement they would not have satisfied the requirements of the Act; and still less can releases given without any consideration at all.  … in the absence of special circumstances, it would not be a good exercise of discretion to make an order of annulment where, if the bankrupt were applying for his order of discharge, an order of discharge would not be granted.”

16.  It seems to me that two things are clear from that decision.  First, emphasis was placed on the reference in the section to payment “in full”.  Second, the court was concerned to avoid the possibility that a bankrupt might obtain by an annulment, a result which would be similar to that of a discharge from bankruptcy – something that was very difficult (and indeed, almost impossible) to obtain under the old bankruptcy regime.

17.  It is also, I think, relevant to note that the debts which were required to be discharged by payment in full were those which had been proved in the bankruptcy.

18.  The United Kingdom provisions in relation to bankruptcy were substantially amended by the Insolvency Act 1986.  The old provisions relating to annulment under section 29(1) of the Bankruptcy Act 1914 were replaced by Section 282(1) of the Insolvency Act, which is materially identical to the present section 33(1) of Hong Kong’s Bankruptcy Ordinance.

19.  The change was based on the Cork Report, prepared by the committee chaired by Sir Kenneth Cork to consider reforms to the United Kingdom bankruptcy regime.  That report proposed wide ranging reforms, including the introduction of provisions for the automatic discharge of bankrupts from bankruptcy after the lapse of a period of time, thus shifting the focus of the bankruptcy laws in favour of the rehabilitation of the debtor, to enable him to re-enter commercial life with a clean slate.  Paragraph 619 of the Cork Report, dealing with termination of bankruptcy proceedings, stated:-

“… Under our proposals, the Court will have power to terminate a [Bankruptcy Order] if the debtor can satisfy the Court of his having paid or his ability to pay his debts in full.  The court will possess a wide discretion to ensure that the interests of the creditors, commercial morality and public policy are each sufficiently safeguarded.”

20.  In the United Kingdom, apart from the changes introduced by the Insolvency Act, subsidiary legislation in the form of the Insolvency Rules were also brought into effect.  Those rules included provisions bearing on applications for annulment under section 282(1)(b) of the Insolvency Act, such as rule 6.207, which required the trustee in bankruptcy to report on whether or not there were known creditors who had not proved, rule 6.209, which enabled the court to adjourn an application for annulment to enable the trustee to notify such creditors of the application and require them to lodge their proofs (if they intended to do so) within a stated period of time, or to advertise for proofs from unknown creditors, with a view to ensuring that any creditor who wished to prove in a bankruptcy was given an opportunity to do so, and rule 6.211, which continued to require full payment of all debts proved in the bankruptcy, and provided for the giving of security for disputed proofs, or proofs submitted by creditors who were no longer contactable.  Separately, there were provisions enabling proofs to be amended, withdrawn (by agreement between the creditor and the Official Receiver), or expunged.

21.  When Hong Kong came eventually to consider reforms to its own bankruptcy regime, these were based on a report of the Law Reform Commission in 1995, which largely recommended adoption of the amendments which had been made in the United Kingdom.  In its report, the Commission recommended the adoption of the amendments effected by section 282(1)(b) of the Insolvency Act 1986, in the following terms:-

“7.8   The Official Receiver also proposed the adoption of the provision under the Insolvency Act [i.e., section 282(1)(b)] that, if the bankruptcy debts and expenses have all, since the making of the order, been either paid or secured for to the satisfaction of the court, the court may annul the order.  This provision would change the emphasis under the Bankruptcy Ordinance as it would not longer be essential that the debts have been fully paid in case so long as the court is satisfied that the debts have been fully secured.  We recommend that it should be left to the discretion of the court to decide whether debts have been properly paid or secured for.”

22.  This resulted in the enactment of the new section 33(1) of the Bankruptcy Ordinance.  However, although that provision refers, in the opening words of subsection (1)(b) to “the extent provided by the rules”, no relevant rules have ever been introduced by way of subsidiary legislation.

23.  Against this background, what meaning is to be given to the word “paid” in section 33(1)(b)?  In Re Lo Cheuk Chiu, Deputy Judge To considered that “paid” in this context meant paid in full, regarding the inclusion of the words “in full” in the old legislation as mere surplusage, so that their omission in the current provision makes no difference.  In his view, if a debt was “paid”, it necessarily had to be paid in full.

24.  With respect, that does not seem to me to be the only meaning that can be given to the word “paid”.  In my view, while a debt would undoubtedly be regarded as having been “paid” if it is paid in cash in full, it is equally possible to regard a debt that has been discharged, whether by full or partial payment, or by the substitution of the payment obligation with a different obligation (for example to provide goods or services) as having been “paid”.  The dictionary definitions of “paid” include “to satisfy” or “to discharge an obligation” (see the definitions in the Shorter Oxford English Dictionary).  While a release unsupported by consideration would not, I think, amount to payment, a payment of a lesser sum in discharge of an debt amounting to an accord and satisfaction which has the effect of extinguishing the debt would, in my view, be aptly described as a situation in which the original debt has been “paid”, although perhaps not “in full”.

25.  Further, having regard to the different meanings of the word “paid” that I have identified, it does not seem to me that the inclusion of the words “in full” in the old version of the legislation should be regarded as mere surplusage.  It seems clear from the views expressed by the English Court of Appeal in Re Keet that the requirement of payment “in full” played an important part in the court’s reasoning.  From this, it follows that I would not regard the omission of those words from the current provision as being of no significance.  On the contrary, it seems to me that their omission is entirely consistent with the interpretation of the word “paid” having the wider meaning which I have mentioned.

26.  Further, the adoption of the wider interpretation of the word “paid” would also appear to accord with the recommendation of the Law Reform Commission that it should be left to the discretion of the court to decide whether a debt had been properly paid or secured for.

27.  Miss Man submitted that to construe the word “paid” in this way would be to read into the section words (such as “settled” or “discharged” or “satisfied”) that are not there.  However, given that the word “paid” is capable of connoting these meanings, it does not seem to me that this criticism is well-founded.  I would therefore, with respect, disagree with the conclusion reached by Deputy Judge To.

28.  Mr Chan also relies on the decision of the English Court of Appeal in Official Receiver v McKay as supporting the adoption of a wider approach to the meaning of the word “paid”.  In that case, a bankruptcy order was annulled under section 282(1)(b) of the Insolvency Act 1986 where the proof submitted by the only creditor was withdrawn by agreement between the trustee (in that case the Official Receiver) and the creditor concerned.  Mrs McKay (the bankrupt) appealed against the annulment on this basis, as she wished to contend that an annulment should have been granted under the other limb of section 282(1) – namely, subsection (1)(a), on the basis that the bankruptcy order against her should never have been made.

29.  In that case, the court of appeal held that it was appropriate to order the annulment of the bankruptcy under section 282(1)(b), as there was no longer a proof in Mrs McKay’s bankruptcy, the only proof having been withdrawn in accordance with the rules.  The court held that although rule 211 of the Insolvency Rules required payment in full of all proved debts, what was required was payment in full of all proved debts as the proofs stood at the time of the application for annulment, so that where a proof had been withdrawn, it need not be paid, and where it had been reduced by an amendment to it, all that was required was that the reduced amount should have been fully paid.

30.  While the case is not of direct application to the situation before me, given the absence in Hong Kong of rules equivalent to those in the Insolvency Rules, there are some observations by the English Court of Appeal which are, I think, of relevance for present purposes.  In particular, Lloyd LJ drew attention (at paragraph 38 of the judgment) to the point that the section could fairly be regarded in the light of the changed policy as to discharge, so that the approach in the older English cases, such as Re Keet, where the court’s concern to minimise the possibility that the formerly restrictive provisions in relation to discharge could be too easily avoided, was no longer appropriate in the light of the new approach.

31.  In the circumstances, it does seem to me that I should not follow the interpretation of section 33(1)(b) adopted by Deputy Judge To, but adopt instead the more liberal interpretation advocated by Mr Chan, particularly as there would seem to be little point in continuing with this bankruptcy, where there is a surplus of assets, and no creditor laying claim to them.

32.  Ms Man also suggested that in a situation such as the present, it would have been open to Ms Lo to have proposed an individual voluntary arrangement in respect of her debts, under which full information would have been provided to her creditors of her financial position.  With respect, I do not see that this would have been an approach that should have been taken.  The purpose of an individual voluntary arrangement is to enable a compromise to be adopted that is binding on all the creditors of the debtor, whether or not they individually agree to it, provided that the necessary proportion of the creditors (three quarters in value and a majority in number) agree.  It is designed to deal with a situation in which the debtor is unable to agree terms with all of the creditors individually.  Where a debtor has, as here, only a single creditor, with whom he is able to agree terms on which his debt to the creditor will be discharged, there is no reason to require him to go through the individual voluntary arrangement procedure – after all, with only a single creditor, his consent would be required in any event.  Moreover, in the present case, it is difficult to see how any such arrangement could be proposed, given that the petitioner has made it clear that it no longer regards itself as a creditor of Ms Lo, so that there would be no creditor to attend any meeting that might be convened for the purpose of considering such an arrangement if one were to be proposed.

33.  Ms Man also indicated that the Official Receiver was concerned as to whether or not the petitioner had entered into the compromise with adequate information as to Ms Lo’s financial position.  With respect, that is a matter for the petitioner to consider for itself.  In any event, the petitioner was legally represented, and would have had the benefit of its solicitors’ advice in relation to the settlement that was reached.  Those solicitors had also assisted Ms Lo to draw up her statement of affairs, and to approach the Official Receiver with a view to obtaining an annulment of her bankruptcy, and they would therefore have had available to them information concerning her financial position.

34.  I am therefore satisfied that it is open to me to grant the annulment sought, if it would otherwise be appropriate to exercise my discretion in favour of doing so.  For the reasons which I explained in paragraph 33 of my judgment dealing with Ms Lo’s application for early discharge, I am satisfied that it would be appropriate for me to exercise my discretion in her favour and grant the annulment sought.

35.  Finally, I would respectfully disagree with Deputy Judge To insofar as he suggested that commercial morality demands the refusal of an order of annulment in a case such as this, on the basis that the bankrupt has not paid the whole of her debt to the petitioner in full, and has no intention of doing so.  With great respect, it seems to me that to take such a view does not give sufficient regard to the encouragement that the law has always given to parties to settle their disputes wherever possible.  Where the parties have entered into a freely negotiated compromise, it seems to me that there is nothing commercially improper in respecting it.  In the present case, the petitioner has made it very clear that it does not regard the bankrupt as being indebted to it any longer, and does not intend to participate in her bankruptcy.  That being so, and there being no other creditors of the bankrupt (none have appeared despite the application having been appropriately advertised), commercial morality would, I think, be better served by permitting the bankrupt to obtain an annulment of her bankruptcy and returning to normal commercial life.

36.  Thus, for the reasons which I have given, I shall order that Ms Lo’s bankruptcy should be annulled pursuant to section 33(1)(b) of the Ordinance.  So far as the costs of the application are concerned, as it was, in my view, appropriate for the Official Receiver to have appeared on the application, and to do so by counsel, I shall make a costs order nisi that Ms Lo is to pay the Official Receiver his costs in relation to this application, such costs to be taxed on the party and party basis if not agreed.