RE 高有恒

HCB 5482/2008

[2019] HKCFI 1621

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS

NO 5482 OF 2008

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REASONS FOR DECISION

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Introduction

1.  This is an application of the discharged bankrupt (高有恒) (the “Applicant”) to annul the bankruptcy order made against him on 19 August 2008 and to dismiss his own bankruptcy petition filed herein on 8 July 2008 (the “Annulment Application”). 

2.  I had at the hearing on 23 May 2019 granted the Annulment Application.  The Official Receiver requested me to issue a written decision on this case for future reference in other similar cases.  I set out below the reasons for my aforesaid decision.  

3.  The Applicant petitioned for his own bankruptcy on 8 July 2008. A bankruptcy order against him was granted by the court on 19 August 2008. The Applicant was discharged from bankruptcy on 19 August 2012 pursuant to section 30A of the Bankruptcy Ordinance (Cap 6) (the “Ordinance”). 

The Annulment Application

4.  On 17 April 2019, the Applicant took out the Annulment Application under section 33(1)(b) of the Ordinance on the ground that all his provable debts and the bankruptcy expenses had since the making of the bankruptcy order been either paid or secured. 

5.  There is no dispute that the expenses of the bankruptcy in this case have been either paid or secured.  The concern of this case is whether all the provable debts have also been paid or secured. 

6.  In the Statement of Affairs filed by the Applicant for his bankruptcy petition (the “SOA”), the Applicant stated that he had one secured creditor and five unsecured creditors. 

7.  The Official Receiver was appointed the trustee-in-bankruptcy of the Applicant’s estate.  The Official Receiver received three proofs of debt from two of the unsecured creditors named in the SOA and from the Commissioner of Inland Revenue (“IRD”) who had not been included in the SOA.  All these three proofs of debt were subsequently withdrawn after settlement of the debts concerned. 

8.  Investigation of the Official Receiver also showed that the Applicant in fact had two secured creditors. 

9.  In the Annulment Application, the Applicant produced evidence to show that all his secured creditors had been fully repaid and that the securities concerned had been released by the creditors. 

10.  In the Annulment Application, the Applicant submitted confirmation from three of his unsecured creditors included in the SOA confirming that the debts due from the Applicant to them had been fully settled and that they had no objection to the Annulment Application.  The Applicant also produced confirmation from IRD confirming full payment of the outstanding due from the Applicant to IRD.  IRD also confirmed that he had no objection to the Annulment Application. 

11.  However, the Applicant produces no evidence of payment to the two remaining unsecured creditors disclosed in the SOA, namely 聯勝(香港)化工有限公司 (“聯勝”) and 永明洗水有限公司 (Keep Clean Washing Limited) (“KCWL”). 

12.  In the SOA, the Applicant stated that he owed 聯勝 $269,705 and he owed KCWL $228,000 (the “Outstanding Debt”). 

13.  The Applicant said that the debt owed to 聯勝 was for supply of goods under a verbal agreement and the debt owed to KCWL was sub-contract fee (承包費) also under a verbal agreement. 

14.  The Applicant proposed that a sum of money sufficient to cover the principal of the Outstanding Debt and interest thereon up to 31 August 2019 would be held the Applicant’s solicitors as stakeholder for six years from the date of annulment as security for payment of the Outstanding Debt (the “Proposed Security Arrangement”).  The Applicant’s solicitors are prepared to give a personal undertaking to the court for the Proposed Security Arrangement.  However, the Official Receiver has reservation on the Proposed Security Arrangement referring to Re Dennis [1895] 2 QB 630. 

The Outstanding Debt

15.  The Official Receiver confirmed that both 聯勝 and KCWL had not filed proof of debt. 

16.  The Applicant stated in his Affirmation filed herein on 18 April 2019 in support of the Annulment Application that he had recently tried to contact 聯勝 without success.  Letter sent by the Applicant’s solicitors on 18 July 2018 to 聯勝 at its address last known to the Applicant (ie the address of 聯勝 stated on the SOA) was returned and marked: “Moved, redirection service not arranged by addressee”.  Search with the Companies Registry showed that 聯勝 had not been registered in Hong Kong with the Companies Registry. 

17.  Search with the Companies Registry showed that KCWL had been wound-up by court order made in 2010 and was dissolved on 10 January 2014.  According to records filed with the Companies Registry, the court had already on 9 January 2014 released the Liquidators of KCWL.  Letter sent by the Applicant’s solicitors on 18 July 2018 to the former Liquidators of KCWL at their address recorded in the Companies Registry was returned and marked: “Addressee unknown”. 

18.  The Applicant submitted that in the circumstances of this case, the Outstanding Debt would be fully secured under the Proposed Security Arrangement. 

19.  The Official Receiver did not agree.  Ms Yau of the Official Receiver’s office submitted that in order to secure the repayment for the Outstanding Debt, the security money should be paid into court. 

Discussion

20.  Ms Yau referred to Re Dennis (supra) where the bankrupt had paid all his creditors in full except two creditors who could not be found and whose debts were entered in his statement of affairs.  The bankrupt obtained an order rescinding the receiving order by making a payment into court the whole amount of the debts concerned.  Neither of these two creditors ever tendered a proof or made a claim to the money in court.  After the time under the Statute of Limitations expired, the bankrupt applied to have the money paid out of court and returned to him as surplus contending that those two creditors would have been time-barred to claim the money paid into court.  The court in rejecting the bankrupt’s application distinguished between debts which were disputed and debts the creditors of which could not be found.  The court considered that it was only for the disputed debts that the annulment would make the Statute of Limitations apply.  For the debts the creditors of which could not be found, the court considered that the payment was paid on trust for those creditors. 

21.  Ms Yau submitted that according to the ruling in Re Dennis, the payment into court for debts the creditors of which could not be found was paid on trust for those creditors and no limitation period would apply in relation to the claims by those creditors for payment out.  She submitted that: “if the known but unproved creditors have not yet been traced, and if the court wishes to consider some form of holding up a sum of money by some appropriate party to cater for subsequent claims by these creditors as a condition for the grant of an annulment order, it would appear that the procedure of payment into court is a better option than the arrangement proposed by the Bankrupt’s solicitors here.”  (See para 18 of the Report of the Official Receiver and Trustee dated 20 May 2019)

22.  I agree with Ms Yau that if the money to be held is held on trust for the creditors concerned, there will not be limitation period for the creditors to apply for payment.  The issue before the court is whether the money to be put up by the Applicant will be held on trust for 聯勝 and KCWL. 

23.  In Re Dennis (supra), the annulment of an order of adjudication was governed by sections 35 and 36 of the Bankruptcy Act 1883 (the “1883 Act”).

24.  Section 35 of the 1883 Act provided that: “Where in the opinion of the Court … 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.”

25.  Section 36 of the 1883 Act stated that: “For the purposes of this part of the Act, any debt disputed by a debtor shall be considered as paid in full, if the debtor enters into a bond, in such sum and with such sureties as the Court approves, to pay the amount to be recovered in any proceeding for the recovery of or concerning the debt, with costs, and any debt due to a creditor, who cannot be found or cannot be identified, shall be considered as paid in full if paid into court.” 

26.  From the above, it can be seen that under the 1883 Act the debts of the bankrupt had to be “paid in full” before the court might annul the relevant adjudication order.  For the purposes of annulling an adjudication order under the 1883 Act, debts were divided into two categories, namely undisputed debts and disputed debts.  Undisputed debts were further sub-divided into two categories of: (a) debts the creditors of which could be found; and (b) debts the creditors of which could not be found or identified. 

27.  As such, under the 1883 Act, there were three types of debt a bankrupt had to pay in full before the court might annul the adjudication order.  These debts were:

(1)   Undisputed debts the creditors of which could be found (the “1^st Type of Debt”);

(2)   Disputed debts the creditors of which could be found (the “2^nd Type of Debt”); and

(3)   Undisputed debts the creditors of which could not be found or identified (the “3^rd Type of Debt”). 

28.  The 1883 Act required all the aforesaid three types of debt to be paid in full before the court might annul the adjudication order.  Naturally, for the 1^st Type of Debt, evidence of payment in full would be direct confirmation from the creditors.  For the 2^nd Type of Debt and the 3^rd Type of Debt, the 1883 Act had made specific provisions for their payment in section 36 for the purposes of an annulment application. 

29.  Under section 36 of the 1883 Act, the 2^nd Type of Debt “shall be considered as paid in full, if the debtor enters into a bond, in such sum and with such sureties as the court approves, to pay the amount to be recovered … … with costs”.  Whereas, the 3^rd Type of Debt “shall be considered as paid in full if paid into court”. 

30.  Vaughan Williams J stated in Re Dennis (supra) at 632-633 that:

“What s.36 provides for is, first in respect of disputed debts. There, a bond is sufficient; and in that case it may very well be that the effect of annulling the adjudication, or annulling the receiving order, is to make the Statute of Limitations apply; and I know of nothing which would prevent the statute applying, because in such a case there is no trust in favour of the creditor, and there is nothing that amounts to a payment to take the case out of the statute.” (Emphasis added)

31.  The learned judge went on to say at 633 that:

“But the section [ie section 36] makes a difference in the case of debts which are not disputed. There, it does not provide for the giving of a bond, but that the money shall be paid into court. In my opinion it is not paid into court as security at all. It is paid into court for the creditor whenever he likes to come for it.” (Emphasis added)

32.  The Annulment Application is an application under section 33(1)(b) of the Ordinance which provides that:

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

(a) … …; or

(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.”

33.  It can be seen that “provable debt” instead of “disputed/undisputed debt” is the relevant concept for determination of the Annulment Application and it is not a prerequisite for the granting of an annulment order that all the provable debts have to be “paid”.  They can either be “paid” or “secured”.

34.  “Provable debt” is described in section 34 of the Ordinance.  There is no dispute that the debts of 聯勝 and KCWL are provable debts.  In such case, for the court to grant the Annulment Application, the Applicant has to satisfy the court that the debts due to 聯勝 and KCWL have either been paid or secured.  There is no question of the debts concerned not being paid.  The concern of this court is whether they have been secured. 

35.  A provable debt is not repayable in bankruptcy until the debt is admitted by the trustee and becomes a proven debt.  A time-barred debt will be rejected by the trustee in adjudicating the relevant proof of debt and will not be admitted as proven debt.  A time-barred debt though provable will not become a repayable proven debt in bankruptcy. 

36.  As pointed out above, the 1883 Act required all debts of the bankrupt to be “paid in full” before the court might annul an adjudication order.  Whereas, the Ordinance does not mandate all provable debts to be repaid before the court may annul the bankruptcy order.  The Ordinance also allows the bankrupt to secure the provable debts in order to have the bankruptcy order annulled. 

37.  If a sum of money is put up to secure a provable debt for the purposes of section 33(1)(b) of the Ordinance, the money of course is only a security and does not belong to the creditor concerned until he/she has proved his/her debt in subsequent proceedings.  In such case, the money whether held by the Applicant’s solicitors or by the court will not be held on trust for the creditor concerned.  It was held by the solicitors or the court as security pending the creditor concerned successfully proves his/her debt.  If the creditor concerned subsequently successfully proves his/her debt, he/she may claim payment of the money.  However, before the creditor concerned has successfully proved his/her debt, he/she does not have any legal entitlement to claim payment of the money as the money is not held on trust for him/her and the money does not belong to him/her.

38.  In such case, the money provided as security for the debts of 聯勝 and KCWL is different from the money paid into court in the case of Re Dennis.  In that case, the money was paid to satisfy the undisputed debts of certain unfound or unidentified creditors whereas in the case before me, the money will be paid only as security for certain provable debts. 

39.  The debts due to 聯勝 and KCWL were debts incurred pursuant to oral agreements.  Claims under such agreements are subject to the provisions of the Limitation Ordinance (Cap 347).  In such case, I am satisfied that the Proposed Security Arrangement has fully secured the Outstanding Debt.  As the Applicant has paid all his secured creditors and his other unsecured creditors in full and has secured the Outstanding Debt by the Proposed Security Arrangement, I am satisfied that the requirements of section 33(1)(b) of the Ordinance have been met. 

40.  The Official Receiver confirmed that the Applicant had been co-operative in the administration of his estate and the Official Receiver was not aware of the Applicant having committed any offence under the Ordinance or any other offence connected therewith.

41.  I grant the Annulment Application upon the Applicant’s solicitors’ undertaking to hold for six years after publication of the annulment order on newspapers $518,500 as security for the provable debt due to 聯勝 and $438,500 as security for KCWL’s provable debt. 

42.  The Official Receiver asks for her costs for the Annulment Application in the sum of $5,000 which the Applicant has agreed to pay.  I so order.