RE YUE MAN PAK

HCB 2178/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 2178 OF 2011

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REASONS FOR DECISION

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The petitioner’s petition for Bankruptcy Order

1.  The Official Receiver opposes the debtor’s presentation of the petition based upon the Decision of Master Ho in Re: Chung Wai Ling Simie, Ex parte Chung Wai Ling Simie HCB16025/2003 delivered on 25 February 2004 (“the Decision”). She asks me to dismiss the debtor’s petition. The solicitor acting for the debtor argues that since the IVA has been terminated and no one is prejudiced by the irregularity, he asks me to grant the Bankruptcy Order. He has submitted in his written submissions that if the Court dismisses the petition, the debtor will present his petition again. The facts of this case are surprisingly similar to the facts in HCB16025/2003 to the extent that they are almost identical so far as they are relevant to the legal issues for determination. I shall discuss the Decision and set out briefly the facts of the case of HCB16025/2003 below. I have directed those representing the debtor and the Official Receiver to submit their written submissions to me the day before yesterday, with which they have duly complied and I am grateful for their assistance.

HCB16025/2003

2.  The petitioner presented her petition for bankruptcy before termination of the individual voluntary arrangement (IVA) under sections 20 and 20A, the IVA being only terminated by the nominee filing the Certificate of Default about 2 months after her presentation of the petition. When the petition was heard before the learned master, the petitioner was no longer bound by the IVA. The Official Receiver and the Petitioner took the view that although the IVA was subsisting when the petition was presented, the petitioner was entitled to do so under section 3(1)(b). However, the learned master took a different view. He considered that under section 3(1)(c), since the petitioner was still bound by IVA, she was not entitled to present the petition. Having considered the provisions and the conflicting opinions of Lawson on Individual Voluntary Arrangement para. A19-1 [Decision - 15] and Fletcher on the Law of Insolvency, 2002 Edn. at p.130-131, para.6-077 [Decision -22], the learned master adopted the views of Fletcher and held that the petitioner was not entitled to present her own petition for bankruptcy. He dismissed her petition. [Decision - 23]

3.  After the Decision, there were other cases of similar situations where the masters, based upon the above Decision, had dismissed the petitions. The Official Receiver has, since the Decision, changed the stance to oppose similar petitions based upon the reasons set out in the Decision. As a result, the debtors’ deposits at the Official Receiver were forfeited. The petitioners had to present the petitions, pay the deposits again and start the bankruptcy proceedings afresh. In fact, if not for the dismissal, the petitions would have been dealt with and bankruptcy orders would have been made. According to the Official Receiver, no creditor or any other person had raised objection to the technical non-compliance set out in the Decision. Having reviewed the matter myself, I find that I am unable to follow the Decision and I therefore convene this hearing to re-consider this application. I now set out my reasons for my deviation from the Decision.

4.  It is common ground that although the Decision is not binding upon me, it remains a persuasive authority for my determination of the issues. Since I hold different views from the Decision, I shall set out my reasons in detail below.

The hearing before the learned master

5.  The Decision was reached under the circumstance where the parties concerned had raised no objection to the technical issue. In fact, the parties argued before the learned master that they considered that section 3(1)(b) and section 3(1)(c) could operate together. That is to say, the debtor is entitled to present her petition for bankruptcy if she is unable to pay her debts although she is bound by IVA. Section 3(1)(c) therefore refers to another category of persons other than the debtor herself who are entitled to petition for the debtor’s bankruptcy. [Decision – 4]. The learned master held a different view. He considered that section 3(1)(b) and section 3(1)(c) are mutually exclusive. If the debtor is bound by the IVA, she is simply not entitled to present her petition for bankruptcy. [Decision – 23].

Interpretation of section 3(1)(b) and section 3(1)(c)

6.  I shall set out the relevant sections in the Ordinance as follows:-

“3. Who may present a bankruptcy petition

(1) A petition for a bankruptcy order to be made against a debtor may be presented to the court –

(a) by one of the debtor’s creditors or jointly by more than one of them;

(b) by the debtor himself;

(c) by the nominee of, or any person (other than the debtor) who is for the time beingbound by, a voluntary arrangement proposed by the debtor and approved by his creditors; or

(d) where a criminal bankruptcy order has been made against the debtor, by the Official Petitioner.” (emphasis added)

7.  Section 20L of the Ordinance further provides as follows:-

“20L. Default in connection with voluntary arrangement

(1) The court shall not make a bankruptcy order on a petition under section 3(1)(c) (nominee of, or person bound by, voluntary arrangement proposed and approved) unless it is satisfied –

(a) that the debtor has failed to comply with his obligations under the voluntary arrangement; or

(b) that information which was false or misleading in any material particular or which contained material omissions –

(i) was contained in any statement of affairs or other document supplied by the debtor under sections 20 to 20K to any person; or

(ii) was otherwise made available by the debtor to his creditors at or in connection with a meeting summoned under those sections; or

(c) that the debtor has failed to do all such things as may for the purposes of the voluntary arrangement have been reasonably required of him by the nominee of the arrangement.

(2) Where a bankruptcy order is made on a petition under section 3(1)(c), any expenses properly incurred as expenses of the administration of the voluntary arrangement in question shall be a first charge on the bankrupt’s estate.”

8.  Therefore it seems clear that the difference in their views is that the parties’ legal representatives took the view that the words within the brackets in section 3(1)(c) are mere descriptive of the class of persons entitled to present the petition whereas the learned master considered that those words in brackets are restrictive of the rights of the debtor to present the petition whilst the IVA survived.

9.  The learned master relied upon the reasons set out in Fletcher on the Law of Insolvency, 2002 Edn at p.130-131 para.6-007, in which the author discussed section 264(1)(c) of the English Solvency Act 1986, which is equivalent to our section 3(1)(c), as follows:

“Notably, the drafting of section 264(1)(c) precludes the possibility that the debtor himself may present a petition for a bankruptcy order, the underlying logic of this being apparently that it should not be open to a debtor who has induced his creditors to accept his proposal for a voluntary arrangement to render the entire exercise a futility by his own conduct in first defaulting upon his obligations under the arrangement, and thereafter presenting a petition for his own adjudication. This is an important safeguard because the debtor might otherwise occupy a position of considerable tactical strength which he might exploit, in appropriate circumstances, to frustrate the objectives of the voluntary arrangement and thereby to flout the obligations into which he had previously entered with his creditors’ approval. Therefore, if a debtor commits default in connection with a voluntary arrangement it is for the supervisor of that arrangement, or any of the creditors who are bound by it, to determine whether the entire arrangement shall be brought to an end, and a bankruptcy order applied for by way of a petition.” [Decision – 22]

10.  The learned master accepted the reasons above and found that as long as the debtor was bound by the IVA, she was not entitled to present her petition. Obviously, the mutual exclusivity of section 3(1)(b) and section 3(1)(c) arises from the words in brackets, viz (other than the debtor) in section 3(1)(c).

11.  The above view is inconsistent with the view in Lawson on Individual Voluntary Arrangements. At  para. A19-1, it is stated:

“Notwithstanding the approval of a voluntary arrangement, a bankruptcy order may be made against the debtor in three quite different sets of circumstances. First, there may be a petition based on default. Secondly, a petition may be brought against the debtor by a creditor who either was not bound by the voluntary arrangement or whose debt arose after the voluntary arrangement was approved. Thirdly, the debtor may present his own petition.” (emphasis added) [Decision – 15]

Reasons for my deviation from the Decision

12.  Although the learned master accepted the reasons given by Fletcher and rejected Lawson’s view, I do not think I can draw the same conclusion as the learned master has done for the following reasons:

(1) Section 3(1)(b) does not say that it is subject to section 3(1)(c). This is the debtor’s statutory right, which should not be taken away without express provision in the statute;

(2) Section 3(1)(c) should be read together with section 20L. Subsection 1 of section 20L provides that the court shall not make a bankruptcy order on a petition under section 3(1)(c) (nominee of, or person bound by, voluntary arrangement and approved) unless it is satisfied … …..(emphasis added)  Here it does not say that the court should not make a bankruptcy order on a petition presented by the debtor himself;

(3) On a close reading of section 3 and section 20L of the Bankruptcy Ordinance, I tend to find that the words in brackets in section 3(1)(c) are descriptive of the class of persons entitled to present the petition, rather than restrictive of the debtor’s right to present the petition for bankruptcy as the learned master has found them to be. If the debtor is not in breach of the IVA, the debtor is, of course, not entitled to present his petition because he cannot say he is unable to pay his debt under the IVA. I think for this reason, we see those words within the brackets in section 3(1)(c).  I prefer Lawson’s views, which is a literal interpretation of section 3 of the Bankruptcy Ordinance; and

(4) If the learned master adopted Fletcher’s views, he should have considered the debtor’s case to see if any of the reasons stated by Fletcher applied to it, which he had not done in his Decision.

13.  I have reservation on the views of Fletcher. Because of the reasons above, I am not bound to accept Fletcher’s views.

14.  Even if I were to take into account of Fletcher’s views above, I do not think his views should apply generally; or his views should represent the views of the legislature. Take the case before the learned master as an example. There was no evidence before the learned master that the debtor had deliberately induced the creditors to compromise by agreeing to the IVA on the one hand, but on the other she presented her own petition for bankruptcy. On the contrary, the evidence clearly shows that the debtor was unable to pay as agreed under the IVA. She had become unable to pay her debt. She was entitled to seek remedy under the Bankruptcy Ordinance. It should be for the nominee to file the Certificate of Default to terminate the IVA or to present a petition for the debtor’s bankruptcy under section 20L of the Bankruptcy Ordinance. The nominee had failed to do it promptly. He only redressed the situation 2 months after the petitioner had presented her petition. The question remains why was it that the debtor was not entitled to present her petition under section 3(1)(b) of the Bankruptcy Ordinance for her own redress when she was unable to pay her debts under the IVA and why was it necessary that the debtor should be required to take action against the nominee before she could present her petition, bearing in mind that the debtor had no financial means to take on any legal action herself. The debtor was acting in person without legal advice. The Official Receiver appeared before the learned master and supported the debtor’s petition. She did not raise any issue of prejudice against the creditors or any other persons. The learned master questioned the capacity of the debtor when she presented her petition. It is a question of capacity to present a petition, similar to the issue of capacity to institute a legal proceeding in NISFSMBC- V2006S1 Investment Limited Partnership & Another v. Gainday Investments Limited HCA2738/2008, which I shall discuss below.

Should the Petition be dismissed

15.  Assuming that Fletcher is correct to say that the debtor is not entitled to present the petition when she is bound by the IVA, should the petition so presented by the debtor be dismissed?

16.  From the Decision, the learned master seems to have stopped at finding that the debtor was not entitled to present the petition before the nominee filed the Certificate of Default, terminating the IVA, without considering further whether this is a procedural irregularity, which will not nullify the petition under section 124(1) of the Bankruptcy Ordinance. Section 124(1) provides:

“No proceeding in bankruptcy shall be invalidated by any formal defect or by any irregularity unless the court is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court.”

17.  In his Decision, the learned master has not given the reason for his decision to dismiss the petition. Nor did he say that he had considered any substantial injustice that had caused to any party.

18.  One can only assume that the learned master dismissed the petition solely for the reason that the petitioner had no locus to present the petition at the time it was presented. In other words, the debtor had no capacity to present the petition, which the learned master found to be a nullity.

19.  Section 99 of the Bankruptcy Ordinance provides that the rules and practice of the High Court shall apply to the bankruptcy proceedings unless such rules and practice are inconsistent with the provision of the Bankruptcy Ordinance. For the present proceedings, there is no evidence to show that the rules and practice of the High Court should not apply to the bankruptcy proceedings.

20.  In NISFSMBC- V2006S1 Investment Limited Partnership & Another v. Gainday Investments Limited HCA2738/2008, there was an application for setting aside a default judgment obtained by the plaintiff. One of the grounds for the application was that the plaintiffs should have brought the action in name of the partners instead of the partnership under Order 81 of the Rules of the High Court and counsel submitted that on that ground alone, the default judgment should be set aside. See paragraph 10. The Official Receiver argues in her written submissions that this case concerns the naming of the plaintiff, not the capacity of the plaintiff to sue. I consider that the wrong naming of the party has raised the question of the capacity of the plaintiff in the institution of the proceedings.

21.  In determining whether such defect would nullify the proceedings, Reyes J said:

“11. I disagree.

12. In Dinardo, Lenoci Sr, Lenoci Jr and Schinella t/a One Sylvan Road North Associates v. Lark International Ltd. HCA 14565 of 1998, 2 June 1999, the plaintiff firm did not carry on business in Hong Kong. But it instituted proceedings in the name of the firm (One Sylvan Road North Associates). Objection was taken by the defendant when the firm applied for summary judgment. As here, the defendant argued that Order 81 Rule 1 did not authorise the use of the partnership name as plaintiff.

13. Yuen J held that the institution of proceedings in the firm name was an irregularity. But she added that the irregularity “does not nullify the proceedings”. There being no prejudice to the defendant occasioned by the use of the firm name, Yuen J gave immediate leave to correct the writ to reflect the names of the individual partners in the firm. She then confirmed the summary judgment granted by the Master.

15. Normally, the Court sets aside a default judgment where, as a result of an irregularity, a defendant is deprived of a fair opportunity to acknowledge service of a claim and to state one’s defence. Typical irregularities which lead to the setting aside of a default judgment are: the bad service of a Writ; the giving of judgment before the time for acknowledging service has elapsed; the award of more than a plaintiff is entitled to receive; and the procuring of a judgment by fraud. In the situations just listed, there would be obvious unfairness to the defendant if the irregularities involved were not treated as nullifying the default judgment.

16. Here the misnaming of the plaintiffs could not have caused Gainday any prejudice. Nor is there any allegation of the judgment having been obtained by fraud or having been given for an excessive amount.

17.       In my view, the irregularity identified by Mr. Cheung does not constitute any unfairness which needs to be countered by treating the default judgment as a nullity.  If need be, the irregularity can be readily cured by applying Dinardo and giving leave now to amend the plaintiffs’ names on the Writ.”

22.  It is clear from the reasons of the judgment that whether the Court should treat the irregularity such as to nullify the proceedings depends upon whether such irregularity causes any injustice to the other party. I shall apply the same consideration to see if such irregularity should nullify the petition. Having considered the circumstances, I say that the ultimate result must be ‘no’ since there is no prejudice to any creditors or interested persons. The debtor had instructed solicitors for the presentation of the Petition. He would be unable to pay the instalments under the IVA and he had to borrow money to pay for the IVA instalments. However, it was not the debtor’s fault not to file the Certificate of Default. It was the nominee’s duty to do so. It will be too harsh to demand the debtor to ensure the nominee to discharge his duty by filing the Certificate of Default in order for him to present his petition. In any event, the nominee has now filed the Certificate of Default and thus terminated the IVA.

23.  The Official Receiver in her written submission says that the debtor’s presentation of self-petition prior to the termination of the IVA is neither formal defect nor mere irregularity. It goes to the fundamental questions of his locus standi to file the petition. Indeed, it is a formal defect or an irregularity, which will go to his capacity when he filed his petition. The real question is whether such irregularity should nullify the petition.

24.  The Official Receiver also says that the creditors who were bound by the IVA had suffered substantial and real prejudice because the creditors had no recourse to a bankruptcy petition against the debtor whilst the IVA was still in force unless there are defaults on the part of the debtor in connection to the IVA pursuant to section 20L of the Bankruptcy Ordinance. Such alleged prejudice (which I doubt if there is any) only relates to the establishment of the IVA, not the debtor’s presentation of his petition before the termination of the IVA. The Official Receiver agrees that this does not constitute substantial prejudice in any event.

25.  Finally, the Official Receiver says that the presentation of the petition for Bankruptcy has caused the creditors to suffer further unfairness or real prejudice because the creditors under the IVA would rank pari parsu with other creditors from whom the debtor had made new loans after the IVA.  The dividends available for distribution will be diluted by the new creditors. I am unable to accept this argument because it is a common fact that the debtor was unable to carry out his agreement to pay the creditors by instalments under the IVA. The natural consequence would be for the nominee to petition for the debtor’s bankruptcy under section 20L of the Bankruptcy Ordinance or the debtor presents his own petition after termination of the IVA, in which event, all the creditors would rank pari parsu for the distribution of the debtor’s estate. This result is not due to the pre-mature presentation of the petition by the debtor.

26.  In any event, there is no evidence, by affidavit or presence in court, before me from any creditors or interested parties to complain prejudice against the debtor’s presentation of his petition. It is rather odd to see that the Official Receiver had not raised prejudice in the case before the learned master, but now has done so before me, given that this case is quite similar to the other case.

Conclusions

27.  For those reasons above, I have come to the following conclusions:

(1) I decline to follow the learned master’s view on the interpretation of section 3(1)(b) and section 3(1)(c) of the Bankruptcy Ordinance that they are mutually exclusive. At least, I have doubts about his interpretation, adopting Fletcher’s views. In fact, I prefer Lawson’s view. The words in section 3(1)(c) are merely descriptive of the class of persons entitled to present the petition rather than restricting the debtor’s right to present the petition.

(2) Even if the learned master’s view is correct, I decline to follow his decision to dismiss the petition without further considering whether such irregularity should nullify the petition, taking into consideration of section 124 of the Bankruptcy Ordinance, section99 of the Bankruptcy Ordinance and the authority of NISFSMBC- V2006S1 Investment Limited Partnership & Another v. Gainday Investments Limited HCA2738/2008;

(3) Having considered the circumstances of this case, even if I am wrong in the interpretation of section 3(1)(c) of the Bankruptcy Ordinance and the debtor had no right to present his petition before termination of the IVA, I decide to exercise my discretion under section 124 of the Bankruptcy Ordinance not to invalidate the petition because no substantial injustice or prejudice has been caused by the irregularity to any creditors or interested parties; and

(4) I shall accordingly make a Bankruptcy Order as prayed for by the debtor in his petition.

28.  As to the costs of this hearing today, though the debtor has succeeded in the argument, the Official Receiver was invited by the Court to assist it to solve the legal issues made in the Decision. It would not be right to ask the Official Receiver to bear the costs personally. Mr. Chong has kindly conceded that if the money is paid out of the estate, the money will have to go back to the estate for distribution. For this reason, I decide that there be no order as to costs for today or for any costs reserved for today’s hearing.