NANYANG COMMERCIAL BANK LTD. v. LAM MAN KI KEVIN AND ANOTHER

HCMP 1647/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1647 OF 2002

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REASONS FOR DECISIO N

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Background

1. By an Originating Summons issued on 27 April 2002, the Plaintiff bank commenced legal proceedings against the 1st and 2nd Defendants pursuant to Order 88 of the Rules of High Court seeking, inter alia, the delivery up of vacant possession of the mortgaged premises at Flat D, 36th Floor, Tower 1, Park Belvedere, Shatin ("the Premises") and also the payment of monies due under the Legal Charge.

2. After the action commenced, a bankruptcy order was granted against the 1st Defendant on 5 September 2002. With the consent of the Official Receiver, by an order dated 3 October 2002 under HCB 10157/2002, I granted leave to the Plaintiff to proceed this action against the 1st Defendant notwithstanding the said bankruptcy order.

3. At the hearing on 29 November 2002, I gave Judgment for the Plaintiff against both the 1st and 2nd Defendants for the monies due under the Legal Charge and the usual 28-day possession order against the 2nd Defendant only. The 1st Defendant argued that he may rely upon Section 43F of the Bankruptcy Ordinance ("the Ordinance") to stay at the Premises for a period of 6 months from the date of his bankruptcy order. As such, the 1st Defendant opposed the grant of the usual 28-day possession order. Since this was quite a novel point raised by a bankrupt mortgagor against the mortgagee bank being a secured creditor and apparently there is no direct authority on the issue, I adjourned the matter for full arguments and invited the Official Receiver to make submission at the adjourned hearing in order to assist the Court to determine the issue.

4. The matter restored before me on 24 January 2003. Mr. Wong for the Plaintiff urged me to dismiss the 1st Defendant's opposition to the possession order. Mrs. Lam for the Official Receiver, in essence, did not support the 1st Defendant's arguments. After hearing the submissions of all parties, I decided that as against the Plaintiff being a secured creditor, the 1st Defendant could not rely upon Section 43F of the Ordinance to stay in the Premises. I gave the Plaintiff the usual 28-day possession order against the 1st Defendant, the usual relief clause and costs. At the hearing, I said that I would give my reasons in writing later, which I now do.

Section 43F of the Ordinance

5. Section 43F provides:

"(1) Notwithstanding anything in this Ordinance, where a bankrupt normally resides in premises which comprise part of his estate, he shall be entitled to continue residing in such premises for a period of 6 months after the making of the bankruptcy order and the court may, on application before the expiry of the 6 month period, make an order extending the entitlement for a further period not exceeding 6 months.

(2) Where the bankrupt makes an application for an extension, the court shall assume, unless the circumstances for the case are exceptional, that the interests of the bankrupt's creditors outweigh all other considerations." (emphasis added)

6. On the plain wordings of Section 43F, it is unclear whether the rights of the secured creditors would be affected. Further, as the section starts with "Notwithstanding anything in this Ordinance", it appears that the section may override other provisions of the Ordinance in particular Section 12 which deals with the effect of bankruptcy order and reads as follows:-

"(1) On the making of a bankruptcy order the Official Receiver shall be thereby constituted receiver of the property of the bankrupt, and thereafter, except as directed by this Ordinance, no creditor to whom the bankrupt is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the bankrupt in respect of the debt, nor shall proceed with or commence any action or other legal proceedings, unless with the leave of the court and on such terms as the court may impose.

(2) This section shall not affect the power of any secured creditor to realize or otherwise deal with his security."

7. The 1st Defendant stated that at all material times, he lived with his wife and daughter at the Premises as his family home. He wanted to continue living there for the time being instead of being evicted immediately by the Plaintiff. He argued that the purpose of Section 43F is to give a temporary relief to him despite his bankruptcy.

8. The Plaintiff has no serious dispute on the residence issue. In fact, under paragraph 10 of the Affirmation of Fung Wai Leung of the Plaintiff filed herein on 26 June 2002, the Plaintiff also stated that to their knowledge and belief, the Premises were occupied by the Defendants for domestic purpose. In the premises, the 1st Defendant satisfies the criteria under Section 43F to establish that he normally resides at the Premises. Prima facie, he may get the protection under Section 43F to continue residing at the Premises for 6 months from the date of the bankruptcy order, that is until 4 March 2003.

9. The issue for my determination is whether upon proper interpretation of the wordings of Section 43F, the interest of the Plaintiff, being a secured creditor, is affected by the statutory protection conferred upon the bankrupt mortgagor under the provision.

10. In the annotated general note to Section 43F of the Butterworths Hong Kong Bankruptcy Law Handbook (2nd Edition), the annotator stated the purpose of the section as follows:-

"When the bankrupt's family home passes to the trustee, he is entitled to evict them and sell the home. However, to avoid any personal hardship to the bankrupt and particularly to his family, this section has been enacted to provide the bankrupt's family a temporary reprieve."

It seems from the said passage that according to the learned annotator, the section would only affect the rights of the trustee to evict the bankrupt and his family immediately from their family home upon the grant of the bankruptcy order.

Enactment History of Section 43F

11. Section 43F was added to the Ordinance pursuant to Section 31 of the Bankruptcy (Amendment) Ordinance 1996 with effect from 1 April 1998. The Explanatory Memorandum of the Bankruptcy (Amendment) Bill 1996 ("the Bill") stated that the purpose of the Bill was to implement the recommendations of the Law Reform Commission Report on Bankruptcy published in May 1995 ("the Law Reform Report"). Both Mr. Wong for the Plaintiff and Mrs. Lam for the Official Receiver urged me to go into the enactment history of the legislation and thus the Law Reform Report to ascertain the statutory objective of the section and to identify the mischief that Section 43F intends to remedy.

12. Ever since the English House of Lords decision in Pepper v Hart [1993] 1All ER 42, the court is now entitled to study the legislature debates reported in the Hansard as an aid to the construction of a statute. The learned author of Cross's Statutory Interpretation (3rd Edition at page 161) suggests that the decision in Pepper v Hart not only affects the use of parliamentary materials, but also the extent to which account can be taken of Government Green or White Papers and the reports of advisory committees, the Law Commission, Royal Commissions and like. Failure to look at reports such as those of the Law Reform Commission, according to the learned author, can "lead to a divergence between what was proposed and how the courts interpret the resulting statutes".

13. Lord Diplock said in Fothergill v. Monarch Airlines Ltd [1981]AC 251 at 281 that where the Act has been preceded by a report of some official commission or committee that has been laid before Parliament and the legislation is introduced in consequence of that report, the report itself may be looked at by the court for the limited purpose of identifying the 'mischief' that the Act was intended to remedy, and for such assistance as is derivable from this knowledge in giving the right purposive construction of the Act.

14. I see no reason why I should not follow the decisions of the said English House of Lords cases. In the second reading of the Bill, the then Secretary for Financial Services reported to the Legislative Council that the Bill largely implemented the recommendations of Law Reform Report. However, from the records of meetings, there was no specific discussion at the Legislative Council on provisions under Section 43F. Since the plain wordings of Section 43F are unclear whether it would affect the interest of a secured creditor, I think it is appropriate and proper for me to ascertain the legislature intention for enacting Section 43F and find out the mischief that it intends to remedy from what were written in the Law Reform Report.

The Law Reform Report

15. The Law Reform Commission acknowledged in its Report that the then Bankruptcy Ordinance was based almost entirely on the English Bankruptcy Act 1914 which was later replaced in 1986 by the Insolvency Act 1986. The Commission had duly considered the recommendations of the U.K. Report of the Review Committee on Insolvency Law and Practice (which commonly referred to as "the Cork Report") and the Report of the Law Reform Commission of Australia published in 1988 on General Insolvency Inquiry (which commonly referred to as "the Harmer Report").

16. The Commission remarked at paragraphs 9 and 10 of the Introductory Part of the Report as follows:-

"9. The changes in the laws of bankruptcy and the different attitude towards bankruptcy, with greater emphasis on rehabilitation rather than punishment, brought out in the Cork and Harmer Reports makes it opportune for the bankruptcy law to be reconsidered in Hong Kong. While not ignoring other jurisdictions, we have been influenced by the changes in both England and Wales and Australia and have sought to adapt them to the best advantage of Hong Kong ... We would note that throughout this Report we make recommendations based on provisions in other jurisdictions, in particular the Insolvency Act and the Australian Bankruptcy Act 1966, as amended. ...

10. The Commission has taken account of the socio-economic background of bankruptcy in Hong Kong... We have also considered the policy aspects of the bankruptcy law. Both the Cork and Harmer Reports have set out the general position ..."

17. Clearly, the Commission has taken into account the English and Australian legislations when it recommended changes to the bankruptcy law of Hong Kong.

18. Paragraphs 13.37 to 13.46 of the Law Reform Report deal with the family home which lead to the recommendation to introduce Section 43F to the Ordinance. Paragraph 13.39 of the Law Reform Report referred to the provisions of the English Insolvency Act (that is, Sections 336 to 338) which confer rights of the bankrupt's spouse and the bankrupt to occupy the family home. The Report noted that such provisions operate under a broad principle that effectively postpones the trustee's right of sale of the family home for a period of one year after the bankruptcy. Both Sections 337 and 338 of the Insolvency Act make it expressly clear they only bind the trustee of the bankrupt's estate. Thus, such provisions have no effect to bind the secured creditors. The right of occupation either by the bankrupt's spouse or the bankrupt (if he was living with a person under the age of 18 at the time of commencement the bankruptcy) should only be exercisable against the trustee in bankruptcy but not the secured creditors.

19. The Law Reform Report went on to cite the Harmer Report which recommended to postpone the entitlement to obtain possession and complete sale of a family home of a bankrupt to the expiration of 6 months after the commencement of the bankruptcy. At paragraph 13.42 of the Law Reform Report, it stated that under the Harmer Report, it was the trustee who should be entitled to apply for an order to reduce the statutory period of postponement. So it seems that such postponement would only affect the trustee of the bankrupt's estate.

20. To understand the rationale behind the recommendation to postpone the sale of the family home, it is beneficial to go into the Harmer Report itself. At paragraph 916, it states:

"Although the possibility of postponing the sale of a family home would result in the proceeds from the sale of the bankrupt's equity being ultimately available to creditors, it would still involve a real cost to them. The policy considerations in favour of postponed realization must therefore be considered carefully. The major social policy considerations are the avoidance of unnecessary strain on the family unit (coming on top of the stress of financial problems) and the preservation of continued presence in the neighbourhood and convenient access to places of employment and schools. The bankrupt's trustee will usually act in a reasonable and humane fashion and make an acceptable arrangement with the occupants of the family home so that they might either remain permanently in the property ... or be given a reasonable time in which to vacate and give possession of the property. If there has been default under a security given over the property, the exercise of the right to take possession and to realise the home by the security holder will take the matter out of the hands of the trustee and the bankrupt. However, it is important to consider the situation where no mortgagee sale is proposed and the bankrupt has a substantial equity in the home."

21. The Harmer Report appears to acknowledge the fact that if the bankrupt defaults under the mortgage, the matter will take out of the hands of the trustee and the bankrupt. The statutory postponement would not affect the rights of the secured creditor to take possession and to realise the security.

22. Under the Harmer Report, it was suggested that the postponement should operate if the home is occupied by any one of the following dependants of the bankrupt (either with or without the bankrupt): the spouse, former spouse, de facto spouse, child or a parent of the bankrupt. Nevertheless, the recommendations on family home by the Harmer Report were not adopted and enacted as law in Australia.

23. Finally, in respect of the family home, the Law Reform Report recommended:

"A bankrupt and his dependents should have the right to remain in occupation of the family home for 6 months after the making of a bankruptcy order but at the end of 6 months after the making of the bankruptcy order the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt's creditors outweigh all other considerations. In the event that the court finds exceptional circumstances it should have the discretions to allow the bankrupt and his dependents to remain in the family home for a second period of up to 6 months." (emphasis added)

24. The said recommendation did not make any distinction between unsecured creditors and secured creditors. However, under paragraph 5.12 of the Law Reform Report, the Commission acknowledged that the secured creditors should retain the power to realise or otherwise deal with a security after the making of a bankruptcy order. It recommended that no change should be made to the rights of secured creditors in this regard except in so far as the rights of dependants of the bankrupt are affected under the said recommendations on the family home. This appears to suggest that the secured creditors' right to the family home may be affected or deferred if there involved rights of the dependants of the bankrupt.

25. At the hearing, Mrs. Lam for the Official Receiver referred me to various memos exchanged between the then Attorney General's Chambers and the Secretary for Financial Services during the drafting stage of the Bill to show the discussions on adding the opening phrase "Notwithstanding anything in this Ordinance". Such memos may only reflect the personal views of the law draftsman on the proposed legislation which did not necessarily represent the true legislature intention. Such memos did not fall part of the enactment history of the Ordinance. Mrs. Lam admitted in her submission that she could not find any authority or textbook to support that the court could refer to such memos exchanged between the law draftsman and the administration for the purpose of statutory interpretation. I decide not to refer to such memos in order to ascertain the legislature intention of Section 43F.

26. It can be seen from the English Insolvency Act, the Harmer Report and the Law Reform Report that the intent of the legislature is to protect not just the bankrupt but more importantly, his dependants so that the bankrupt has to prove that he was residing with his spouse or dependants at the time of the commencement of the bankruptcy. Section 43F was drafted more or less in lines with the recommendation of the Law Reform Report with one noticeable difference: there is no requirement to prove that the family home was occupied by the bankrupt and his dependants. Instead of protecting the rights of the dependants of the bankrupt, the existing provision under Section 43F apparently only protects the bankrupt.

27. The Law Reform Report recommended no change to the right of the secured creditors except in so far as the rights of the dependants of the bankrupt are affected in the family home. Unlike the provisions of the Insolvency Act and the recommendations of the Harmer Report, Section 43F does not provide to protect the interests of the dependants of the bankrupt in the family home. Thus, I can only conclude that it is not the legislature intent under the section to affect the interests of the secured creditors. In my Judgment, the opening phrase "Notwithstanding anything in this Ordinance" only intends to override the rights of the trustee in bankruptcy to take immediate possession of the family home under other parts of the Ordinance. This interpretation is, in my view, in accordance with the recommendations of the Cork and the Harmer Reports which only recommended protecting the rights of the bankrupt and his dependants to the family home against the rights of the trustee in bankruptcy. The Law Reform Report did not suggest expanding such protection to override the rights of the secured creditors.

Section 43(5) of the Ordinance

28. In coming to the above conclusion, I have considered the wordings of Section 43(5) of the Ordinance which was also added to the Ordinance at the same time with Section 43F.

29. In order to obtain the protection under Section 43F, apart from proving that he was normally resides in the premises, the bankrupt has to prove that the premises are comprised as part of his estate. Therefore, it is appropriate for me to consider Section 43 of the Ordinance which defines the bankrupt's estate. Section 43(1) provides:

"Subject to this section and sections 43A to 43E, a bankrupt's estate comprises - (a) all property belonging to or vested in the bankrupt a the commencement of the bankruptcy; and

(b) any property which by virtue of any of the provisions of the Ordinance is comprised in that estate or is treated as falling within paragraph (a)."

30. The section goes on to provide for properties which are excepted from the estate. Section 43(5) then provides:

"For the purposes of any provision in this Ordinance, property comprised in a bankrupt's estate is so comprised subject to the rights of any person other than the bankrupt (whether as a secured creditor of the bankrupt or otherwise) in relation thereto ..." (emphasis added)

31. Mrs. Lam for the Official Receiver submitted that although under Section 43(1), the family home of the 1st Defendant (which is secured by the Legal Charge in favour of the Plaintiff) would still be comprised in the bankrupt's estate, by virtue of subsection (5), it will subject to the rights of the Plaintiff as a secured creditor. In fact, according to Mrs. Lam, it is not the practice of the Official Receiver to take possession of any mortgaged property which is subject to the prior interest of a secured creditor especially in falling market unless the secured creditor agrees to surrender possession voluntarily.

32. I agree with such interpretation. In my view, Section 43(5) clearly provides to preserve the interest of the secured creditors over the bankrupt's property. When reading Sections 43(5) and 43F together, I have little doubt to conclude that it is not the intent of the legislature to take away the rights of the secured creditors to the mortgaged property by means of the provision of Section 43F. At least, the wordings of Section 43F are not as clear and express to do so.

Common Law Authorities on Statutory Interpretation

33. At law, there is a well established presumption that the legislature does not intend to limit vested rights further than clearly appears from the enactment. Further, if there is any ambiguity, it is presumed that the legislature does not intend to limit vested rights further than clearly appears from the enactment (Re Metropolitan Film Studios Ltd. V. Twickenham Film Studios Ltd. (Intended Action) [1962] 3 All ER 508 at 517).

34. To illustrate the said presumption, Mrs. Lam for the Official Receiver has helpfully referred me to the English Court of Appeal case of Allen v. Thorn Electrical Industries Ltd. [1968] 1 QB 487. The case turns on the interpretation of the word "paid" under Section 29(4) of the Prices and Incomes Act 1966 : whether "paid" means actually paid or contracted to be paid? The Court of Appeal unanimously held the latter should be the correct interpretation. While Lord Denning MR had no doubt about such interpretation, he went on to say:

"If I were wrong in this view, I am clear that, at any rate, the requirement in the statute is ambiguous and uncertain, in which case the rights under the contract must prevail. No man's contractual rights are to be taken away on an ambiguity in a statute ..."

35. Danckwerts LJ. in his Judgment said:

"Existing legal rights are not to be taken away except by clear words in the statute. If two constructions are possible, the construction which produces unreason and hardship is to be avoided, and the construction which interferes with legal rights of the subject to a lesser extent and produces the less hardship is to be preferred."

36. Winn LJ concluded his Judgment by saying that:

"I think the right view is, and as I understand it always has been, that in such a case of ambiguity, it is resolved in such a way as to make the statute less onerous for the general public and so as to cause less interference, than the more stringent sense would, with such rights and liberties as existing contractual obligations."

37. The rights and powers of the mortgagee to take possession and to sell the mortgaged property upon default of the mortgagor are invariably expressly provided in the Legal Charge. Section 51 of the Conveyancing and Property Ordinance (Cap. 219) stipulates that there shall be implied in any legal charge the powers exercisable by the mortgagee mentioned in the Fourth Schedule. The Fourth Schedule contains the powers of the mortgagee to take possession of the mortgaged land and to sell the same. Therefore, the mortgagee's statutory and contractual vested rights should not be limited or taken away by Section 43F unless it is clearly provided under the section to do so. I take the view that the wordings of Section 43F are by no mean clear and unambiguous and should have no effect to limit or defer the rights of the mortgagee to take immediate possession of the mortgaged property.

38. Furthermore, it defies common sense that as against the mortgagee being a secured creditor, an insolvent mortgagor who is made bankrupt would enjoy a better position than a mortgagor who is not when both of them commit the same kind of default under the Legal Charge for non-payment of the mortgage payments.

39. Section 43F gives a bankrupt temporary relief against immediate eviction from his family home shortly after the grant of the bankruptcy order so that he can make all necessary arrangements. In a mortgagee action, the procedures under Order 88 of the Rules of High Court require the mortgagee to notify the mortgagor of its intention to take possession well before the substantive hearing. Even if a possession order is made, in case of domestic premises, it is the practice of the Court under the Order 88 procedure to allow the mortgagor to give possession 28 days after the relevant possession order is served on him. The Order would also provide for liberty to apply in case the mortgagor requires extra time to move out of the mortgaged property if there exists any special grounds or personal hardship. I think there is sufficient safeguard under the Order 88 procedure against immediate eviction of the mortgagor or his dependants from the family home by the mortgagee.

Conclusion

40. In my Judgment, the proper interpretation of Section 43F after considering its enactment history should be that such section is not intended to affect the vested rights of the mortgagee as secured creditor. The Plaintiff in this action being the secured creditor is entitled to have vacant possession of the Premises despite the bankruptcy of the 1st Defendant. Section 43F only binds the trustee in bankruptcy and the bankrupt's rights to stay for 6 months should only be exercisable against the trustee in bankruptcy.

41 Final but not least, I must thank Mrs. Lam for the Official Receiver and Mr. Wong for the Plaintiff in preparing helpful written submissions to assist the Court and have conducted detailed research on the enactment history of Section 43F.

42. As this case touches on a novel point of law, I have all the parties' consents to publish this Reasons for Decision.