Re Yeung Kwok Lai

HCB 813/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 813 OF 1998

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J U D G M E N T

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Introduction

1. The bankruptcy order against the Bankrupt, Mr. Yeung Kwok Lai was made on 14 October 1998. Pursuant to Section 30A(1) and 2(a) of the Bankruptcy Ordinance ("the Ordinance"), if no objection was raised, the Bankrupt would have been discharged from bankruptcy on 14 October 2002.

2. An application was taken out by the Official Receiver and Trustee ("the Official Receiver") on 6 September 2002 objecting the automatic discharge of the bankruptcy order against the Bankrupt, Mr. Yeung Kwok Lai under Section 30(A)(3) the Ordinance.

3. The Official Receiver filed a Report dated 9 September 2002 in support of the application and relies upon 3 grounds under Section 30A of the Ordinance in support of the application, namely:-

(a) the Bankrupt has failed to co-operate in the administration his estate under Section 30A(4)(c);

(b) the conduct of the Bankrupt either in respect of the period before or the period after the commencement of the bankruptcy has been unsatisfactory under Section 30A(4)(d); and

(c) the Bankrupt has failed to prepare an annual report of his earnings and acquisitions for the trustee under Section 30A(4)(h).

4. The application was first heard before Master Ho on 2 October 2002. The Bankrupt was legally represented at the hearing. Since his solicitors were still taking instructions as to whether the Bankrupt would contest the application, Master Ho gave directions for parties to file and serve documents in support and adjourned the hearing to 6 November 2002. At the same time, Master Ho made an interim order suspending the automatic discharge pending the determination of the application ("the Interim Order").

5. Parties appeared again before Master Ho on 6 November 2002. Mr Ng represented the Bankrupt informed the Court that the Bankrupt would not oppose the application but would make submission to mitigate. I understand that this would mean that the Bankrupt only asked the Court to consider the length of the period when the bankruptcy order would cease to run. In the Bankrupt's case, the Court has the power to consider suspending the running of the relevant period for not exceeding 4 years. At the said hearing, parties had agreed to adjourn the matter for full arguments and the Interim Order shall continue to have effect until further order.

6. The matter came before me on 20 December 2002. At the outset, the Bankrupt sought leave to file his 3rd Affidavit in support. The Official Receiver had no objection and I granted leave accordingly. Both sides had filed skeleton submissions. Counsel for the Bankrupt in her skeleton submission urged the Court first time ever in this action to exercise discretion in favour of the Bankrupt to discharge him automatically or alternatively, to discharge subject to conditions.

7. However, after hearing submission of the Official Receiver and upon taking the Bankrupt's instructions, Ms. Lau for the Bankrupt informed the Court that it was now her instructions not to seek a discharge of the Bankrupt but just to mitigate. She urged the Court that this case is not the most serious case which warrants a maximum suspension of 4 years.

Failure to Co-operate

8. Unless otherwise stated in the later part of this Judgment, as appeared from his 3 Affidavits filed in court, the Bankrupt does not seek to challenge or dispute most of the complaints of the Official Receiver. The Official Receiver submitted that the Bankrupt has repeatedly ignored their requests and demands for the submission of information for administration of the estate. On the very date of the bankruptcy order was granted (ie. 14 October 1998), the Bankrupt attended the office of the Official Receiver for a preliminary interview. At the meeting, a preliminary examination questionnaire was given to the Bankrupt to complete. The Bankrupt promised to complete the same and return on the next day. However, he failed to do so until about 1 1/2 years later in April 2002.

9. At the said meeting, the Bankrupt was also given a pamphlet entitled "A Simple Guide to Bankruptcy" which set out his duties during the period of his bankruptcy until the discharge. At paragraph 15 of the pamphlet, it provides, inter alia, the following duties of the Bankrupt:-

(a) to submit a statement of affairs, making a full disclosure of his assets and liabilities;

(b) to attend interview held by the Official Receiver in the administration of the estate in bankruptcy and investigation of his conduct and affairs;

(c) to assist the Official Receiver to the best of his ability in realising his property for the benefit of the creditors;

(d) to inform the Official Receiver of any change of address or telephone number before his discharge;

(e) to make contribution towards his estate out of his personal income for the benefit of his creditors;

(f) to submit report on each anniversary of the bankruptcy order a statement of his earnings in the preceding year with details of any property acquired;

(g) not to obtain credit either alone or with another person without disclosing his bankruptcy.

The Bankrupt acknowledged receipt of the pamphlet and according to the Official Receiver, an officer had already explained to the Bankrupt of the said duties. Therefore, the Bankrupt should be well aware of his duties from the very first day of his bankruptcy.

10. The Official Receiver also complained against the Bankrupt for repeated failures to attend interviews for the purpose of investigation into the conduct and affairs of the Bankrupt. Since the said 1st meeting with the Bankrupt in October 1998, letters were sent by the Official Receiver to the Bankrupt to invite him to attend further interviews but no response was received until 11 June 2002. The Respondent excused that he did not receive such letters except the one in or about June 2002. Immediately after receipt of the same, he had already attended the scheduled meeting on 11 June 2002.

11. Clearly, the reason why the Respondent failed to receive the letters from the Official Receiver is because his own failure to inform the Official Receiver his current address and whereabouts. According to the Official Receiver, at the time of the bankruptcy order was made, the last known address of the Bankrupt was at Room 1112, Block B, Ming Pao Industrial Centre, 18 Ka Yip Street, Chai Wan, Hong Kong. The Bankrupt did not at the meeting on 14 October 1998 inform the Official Receiver any change of his address. The Bankrupt later sent a fax on or about 12 April 2000 to the Official Receiver stating that his new address was Flat 1101, Irving Court, Pennington Street, Causeway Bay, Hong Kong. However, during the subsequent investigation by the Official Receiver, they could not locate the Bankrupt at that address. Only in January 2002, the Official Receiver received a report from one Wong Yiu Ki who supplied the current address of the Bankrupt at 19th Floor, Elegant Court, 21 Whitefield Road, Hong Kong. Based on such information, the Official Receiver wrote again to the Bankrupt who eventually confirmed the said address as his current residence in the meeting on 11 June 2002.

12. The Official Receiver further complained against the Bankrupt for failure to submit Statement of Affairs and anniversary reports of earnings during the last 4 years despite the fact that the Bankrupt was fully aware of his duty to do so and acknowledged receipt of the sample forms of the Statement of Affairs and Statement of Earnings & Acquisition (commonly known as annual or anniversary report) on 3 different occasions. In October 1998, the Bankrupt agreed to submit the Statement of Affairs within 21 days. In or about April 2000, he agreed to submit the same by 3 May 2000 and lately in June 2002, by 25 June 2002. At no time the Bankrupt was able to keep up his promise to submit the required documents within the time limit and apparently, he gave no explanation at all. Only after the Official Receiver took out the subject application for suspension of the automatic discharge, the Bankrupt eventually submitted the Statement of Affairs and the 3 anniversary reports on or about 30 September 2002.

13. While the Bankrupt admitted that he failed to co-operate with the Official Receiver, he excused that such conduct was less than intentional and/or dishonesty. He tried to explain that he could not accept the reality that he was a failure and an adult male failing to manage his finance. The Bankrupt alleged that his attitude has changed after he met his "good friend" a Mr. Lau who encouraged him to accept his responsibility and to make contact with the Official Receiver.

Unsatisfactory Conducts

14. It is the Official Receiver's case that the Bankrupt failed to resign as director of Ray Design & Associates Ltd ("the Company") in breach of section 156 of the Companies Ordinance. As early as the date of the 1st meeting between the Official Receiver and the Bankrupt on 14 October 1998, the Official Receiver informed the Bankrupt to resign as director of the Company. The Official Receiver had then written a letter dated 27 October 1998 to the Bankrupt to remind him to resign as director. Nothing has been done by the Bankrupt either to file a notice of resignation with the Companies Registry or to obtain leave from the court.

15. The Official Receiver issued a summons under section 156 of the Companies Ordinance on 27 February 2001. After the Official Receiver incurred considerable time and costs in carrying out the prosecution, such summons was withdrawn in October 2001 as the Official Receiver was unable to locate the Bankrupt at that time. The Bankrupt admitted that up to now, he still fails to resign as a director of the Company. In his 1st Affidavit filed on 16 October 2002, the Bankrupt explained that the Company ceased to carry on business before his bankruptcy and the Company was dissolved in September 2002. He could offer no "legitimate excuse" for such failure. But later in his 3rd Affidavit sworn on 19 December 2002, the Bankrupt then explained that although he failed to resign as director of the Company, he no longer worked as director after he was bankrupted. He further stated that he had prepared documents trying to legally resign but was then informed that the Company was no longer exist.

16. I doubt very much the truth of such explanation. If that was the case, I cannot see why he chose not to put the same in his 1st or 2nd Affidavits which were filed in September and November 2002 respectively when he was already legally represented. He has ample opportunities to offer an explanation at that time but he decided not to give a "legitimate excuse". No matter what explanation was given, the facts remain that during the past 4 years, while fully aware of his legal obligation to resign as director of the Company, the Bankrupt failed to take any positive steps to resign and such conduct is clearly unsatisfactory especially causing the Official Receiver to incur costs and time in bringing an abortive prosecution as a result.

17. The Official Receiver further relied upon reports and complaints made by 3 third parties: Mr. Johnny Cheuk ("Cheuk"), Mr. William Woo ("Woo") and Mr. Wong Yiu Ki ("Wong"). Their complaints are summarised as follows:-

(a) According to Cheuk, the Bankrupt failed to disclose the fact that he was a bankrupt and used Cheuk's credit facilities to stay at the Grand Hyatt Hotel for about 16 days from 6 to 21 September 1999. The Bankrupt represented and misled Cheuk that the hotel room was for use of his client from China with whom he was negotiating a design project for the benefit of Cheuk's company. In fact, the hotel room was used by the Bankrupt himself;

(b) Woo alleged that the Bankrupt while failed to disclose his status as a bankrupt, obtained credits from Woo for staying in the Renaissance Harbour View Hotel and the Grand Hyatt Hotel for a total of about 73 days in 1999. According to Woo, the Bankrupt told Woo that he was then investigated by the ICAC for reason that he had bailed out a friend who had jumped bail. As a result, his personal belongings were temporarily confiscated and required temporary monetary support. Woo paid the hotels' bills and by a letter dated 10 October 1999, the Bankrupt acknowledged owing to Woo a sum of $120,596 and promised to repay by the end of October 1999;

(c) Wong alleged that the Bankrupt obtained a loan from him or his company for the sum of $80,000 without disclosing the bankruptcy status. Wong sent to the Official Receiver amongst other documents a loan agreement signed by the Bankrupt dated 3 May 2001 for the said sum of $80,000.

18. In his 1st Affidavit, the Bankrupt alleged that both Cheuk, Woo and Wong were all aware of the fact that he was a bankrupt. The Bankrupt did not dispute the other allegations of Cheuk and Woo. In his 3rd Affidavit, the Bankrupt stated that he had already repaid the money owed to Cheuk and Woo. However, he disputed owing the sum of $80,000 to Wong. The Bankrupt alleged that the sum was advance payments of commission in respect of project then on-going, partly finished but not billed yet. I agree with Ms. Chung for the Official Receiver that such allegation is just bare assertion without any particulars nor documentary proof.

19. The Official Receiver urged me not to believe the Bankrupt's allegation that he had informed Cheuk, Woo and Wong of his bankruptcy status. Without hearing oral evidence of Cheuk, Woo and Wong, I take the view that it is not appropriate and in fact impossible for me to make any factual findings whether Cheuk, Woo and Wong were aware of the Bankrupt's bankruptcy. In any event, for the purpose of this application, there is no need for me to make such factual findings. The Official Receiver is just arguing unsatisfactory conduct of the Bankrupt. They are not relying upon Section 30A (4) (g) of the Ordinance that the Bankrupt has committed an offence under Section 131 of the Ordinance for obtaining credit from other person without disclosing his bankruptcy.

20. No matter whether Cheuk and Woo were aware of the bankruptcy of the Bankrupt or not, the Bankrupt did not dispute that he used the credit facilities of both Cheuk and Woo with the hotels and he eventually repaid the debt to them. From the hotel bills, I note that the room charges for both hotels were more than $1,000 per day. On 2 occasions, the Bankrupt spent $3,000 to $4,000 each time for entertainment at the hotel's disco not to say dining frequently at the hotels' restaurants. Obviously, at the material times, the Bankrupt was leading a luxurious life totally incompatible with his status as a bankrupt. Such conduct is clearly unsatisfactory.

21. The Bankrupt in his 3rd Affidavit tried to explain that he stayed at the hotel to avoid being chased by the creditors. He further stated that for the past years, he pretended that he was not bankrupt and to stay at the hotels would give him a false impression that he was not a bankrupt. If he wanted to pretend not to be a bankrupt and to escape from reality by staying at the hotels, I really doubt if the Bankrupt would ever disclose his status of bankruptcy to Cheuk and Woo when he persuaded them to allow him to use the credit facilities with the hotels. Further, if the Bankrupt did disclose such fact, I doubt whether Cheuk and Woo would allow him to use the credit facilities.

Failure to Prepare Annual Report of Earnings and Acquisitions

22. As stated above, the Bankrupt was well aware of his obligation to prepare and submit the annual report to the Official Receiver from the very first day of his bankruptcy. It is not disputed by the Bankrupt that he failed to submit such annual report during the past years and he only saw fit to submit the 3 annual reports in late September 2002 after the Official Receiver took out the subject application. In his 1st Affidavit, the Bankrupt gave no "legitimate excuse" for the said failure and admitted that he was foolish and alleged that he had no intention to hide anything from the Official Receiver.

23. It may be too early to conclude whether the Bankrupt has or has not hidden any material information from the 3 annual reports and Statement of Affair filed with the Official Receiver as the Official Receiver is still investigating the affairs of the Bankrupt. Nevertheless, the Official Receiver pointed out to the Court that the information provided in the 2nd and 3rd anniversary reports appears to be contradictory to the allegations stated in the 2nd Affidavit filed by the Bankrupt. In the anniversary reports, the Bankrupt alleged that his yearly income in the past 2 years was about $420,000 including salary and bonus. The Bankrupt spent all his income as he alleged that his yearly expenses were about $422,000 (about $35,000 per month). However, at paragraphs 4 to 7 of the 2nd Affidavit, the Bankrupt alleged that out of his gross income of $840,000 for the past 2 years, he spent $153,900 for purchase of equipment, tools and materials for his working team and further spent $110,000 for sharing of commission with his team members. No receipt or document was produced to substantiate the alleged spending. Apparently, such expenses were not stated in his 2nd and 3rd anniversary reports. The discrepancies definitely call for thorough and careful investigation by the Official Receiver of the affairs of the Bankrupt for the past 4 years.

The Law

24. The provisions for automatic discharge of the Bankrupt were introduced into the Ordinance in early 1998 based on the recommendations of the Law Reform Commission's Report on Bankruptcy issued in May 1995. The rationale and the purpose of the automatic discharge of a bankrupt are set out at paragraphs 17.16 and 17.24 which read as follows:

"17.16 The introduction of automatic discharge should, with the objection system, have a two-fold effect. Firstly, bankrupts would have a greater incentive than at present to co-operate with the trustee, as failure to co-operate could result in the trustee objecting to a bankrupt's discharge. Secondly, the rehabilitation of a bankrupt from bankruptcy would be assured, subject to rehabilitation being delayed as a consequence of a bankrupt's own failings."

"17.24 The introduction of automatic discharge would shift the emphasis from discharge being a privilege to its being a right. This right, however, must be set alongside a bankrupt's duty to co-operate with the trustee in the administration of the estate. If he fails to co-operate with the trustee after bankruptcy, or if a bankrupt's conduct before bankruptcy was unsatisfactory, he should not be automatically discharged."

These 2 paragraphs are often referred in previous Judgments of the Court including Re Hui Hing Kwok [1993] 3 HKC 683, Re Li Tat Kong [2000] 3 HKC 360, Re Chung Kwok Yiu, Ringo (unreported, HCB 739/1996) and Re Chan Chun Lam trading as Kwok Lam Trading Development Company (unreported, HCB 287/1996).

25. Thus, "failure to co-operate" with the trustee is a reason for delaying the bankrupt's rehabilitation. As stated by Madam Justice Le Pichon (as she then was) in Re Hui Hing Kwok (supra):

"Rehabilitation in the sense of enabling the bankrupt to resume a normal life in society is a key, if not the key, consideration."

26. Madam Justice Le Pichon in her Judgment of Re Li Tak Kong (supra) (whose Judgment was upheld by the Court of Appeal) set out the applicable principle as to how discretion should be exercised as follows:

"In my Judgment, it is incumbent on the bankrupt to make a full and frank disclosure and to proffer all pertinent information regarding his assets and financial dealings to the trustee. As French J observed in Re Barrie Andrew Knight, No. WB 307 of 1988 (unreported) August 14, 1991, a decision of the Federal Court of Australia,

'... It is not sufficient, I think, for a bankrupt to say in relation to the deficiencies which the trustee complains are unexplained, that it is all there in the transcript of evidence and auditor's report put before the District Court in criminal proceedings. Nor is it sufficient to say that the trustee has not made inquiry of him. It is the bankrupt's duty, if he seeks the indulgence of discharge where discharge would not otherwise be automatically available, to show that he has taken all reasonable steps to ensure that his estate is available for distribution among his creditors and that the trustee is appraised of all relevant information.'

Thus, it is not good enough for a bankrupt to adopt a purely passive or reactive role, responding when asked in the expectation that with any luck, pertinent matters might be overlooked.

Further, in exercising its discretion, the court will have regard to the scope and purposes of the statutory provisions conferring the discretion. In Re Weiss (unreported), 27 June 1986, a decision of the Federal Court of Australia cited in Totterdell v. Nelson (at 344), Burchett J observed :

'An essential part of the reciprocal provisions made by the bankruptcy law for the benefit of each of creditors, debtors, and the community itself, is that there should be an adequate investigation of the conduct and affairs of the bankrupt. In a case presenting features which call for an exercise of discretion upon the question when and on what terms the bankrupt should be discharged, the investigation should generally be carried to a conclusion before a discharge is granted or permitted to occur. There may be cases where it would be unfair to a bankrupt to delay his discharge by reason of an incomplete investigation, lethargically pursued, to the torpor of which he has not contributed. But no such unfairness may appear where there has been concealment or lack of cooperation on his own part.'

The court will also have regard to the interests of commercial morality and the public interest."

The Exercise of Discretion

27. In my Judgment, the Official Receiver has established a case of an objection to the automatic discharge of the Bankrupt under the 3 grounds relied upon by the Official Receiver pursuant to Section 30A(4)(c), (d) and (h) of the Ordinance. As such, it would not be appropriate for the Bankrupt to be automatically discharged.

28. As I understand, Counsel for the Bankrupt in her oral submission made at the hearing, did not seek to dispute the grounds relied upon by the Official Receiver for an automatic discharge. She would like to persuade the Court that the Bankrupt's situation is not a serious one so that the Court should impose a shorter period of suspension instead of the maximum period of 4 years. Ms. Lau submitted that while the Bankrupt acknowledged his duty to inform the Official Receiver of his whereabouts, he failed to attend the interview simply because he failed to receive the appointment letters from the Official Receiver. Further, she submitted that when the Bankrupt received the letter from the Official Receiver in 2002, he did attend the scheduled meeting in June 2002. Therefore, in her view, the Bankrupt's case is not the worst scenario where he knew the appointment but neglected to attend.

29. On the other hand, Ms. Lau tried to compare the Bankrupt's situation with the facts in the Li Tat Kong (supra) and submitted that the Bankrupt's case is less serious than the Li Tat Kong's case where the court found that the bankrupt failed to disclose material information to the Official Receiver. Since the Court only suspended the bankruptcy order in the Li Tat Kong's case for 3 years, Ms. Lau urged the Court to consider not imposing the maximum suspension but rather a suspension of less than 3 years for the Bankrupt's case.

30. I am of the view that in the proper exercise of the discretion, each case must decide on its own facts. The particular special circumstances of each case may influence the court in how such discretion should be exercised. In the Li Tat Kong's case, the Court has taken into account the fact that during the 4-year period, there were 21 months that the bankrupt was a free man when the original receiving and adjudication orders were rescinded and annulled as a result of the approval of the composition of debt. The approval was set aside subsequently and the receiving and adjudication orders were reinstated 21 months later. No such special factor appears in the present case. Thus, I disagree with the Bankrupt's Counsel that 3 years is an appropriate starting point in this case.

31. In considering the proper and appropriate period of suspension in this case, I take into account the following matters:-

(a) The Bankrupt rendered little or no co-operation at all with the Official Receiver during the past 4 years. Despite the fact that on the very first day when the bankruptcy order was granted, he was made aware of his duties, the Bankrupt failed to fulfill his positive duties on repeated occasions. Most probably, the Bankrupt only recognized the serious consequences of his breach of duties after the Official Receiver took out this application and eventually submitted the Statement of Affairs and the annual reports at the end of September 2002.

(b) On 4 different occasions the Bankrupt failed to honour his promise to submit the required documents to the Official Receiver within the time limit indicating that the Bankrupt never takes his promise seriously.

(c) His conduct in neglecting the warning of the Official Receiver to resign as director of the Company is totally unacceptable causing the Official Receiver to waste considerable costs and time in bringing an abortive prosecution. The Bankrupt's explanation of his failure is simply unconvincing.

(d) During the past 4 years, the Bankrupt was leading a life totally incompatible with a bankrupt. He lived in expensive hotels and spent all his income for his own personal or business purposes without due regard at all his duty to contribute to the estate for making repayment to his creditors.

(e) The disclosure so far the Bankrupt made is on the face of it far from satisfactory which definitely calls for thorough investigation by the Official Receiver.

I must conclude that as a result of the failings of the Bankrupt, the interests of the creditors are seriously prejudiced and public interest would not be served if an early discharge is given to the Bankrupt. His rehabilitation must be delayed. Furthermore, in light of the conducts on part of the Bankrupt and the complaints so far received by the Official Receiver from third parties, I am of the view that the Bankrupt's estate could not be properly and fairly administered without an in-depth investigation into the affairs of the Bankrupt.

32. Having regard to the above matters and the cumulative effect of all the unsatisfactory conducts of the Bankrupt, I have little doubt to conclude that this case warrants a maximum suspension of 4 years. Accordingly, I order that the automatic discharge of the Bankrupt be suspended for a period of 4 years and that the Bankrupt shall not be discharged until 14 October 2006.

Costs

33. At the end of the hearing, I have invited parties to make submission on costs. In this case, the Official Receiver sought to have costs against the Bankrupt to be assessed gross sum. The Bankrupt's Counsel agreed that costs of the application should follow event.

34. I, therefore, order that the costs of this application be to the Official Receiver to be paid by the Bankrupt. I agree with the Official Receiver that this is an appropriate case to have a gross sum assessment of costs in lieu of a full taxation under Order 62 Rule 9(4)(b) of the Rules of the High Court. If the parties cannot agree on the amount of costs payable, there be liberty for parties to fix an appointment before me with half an hour reserved for the purpose of the gross sum assessment of costs.