FRED LEE v. LEUNG CHIN YEUNG

cacv 30/2007, CACV 31/2007 AND CACV 32/2007

CACV 30/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 30 of 2007

(on appeal from HCB NO. 8779 of 2002)

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BETWEEN

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CACV 31/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 31 of 2007

(on appeal from HCB NO. 8989 of 2002)

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BETWEEN

CACV 32/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 32 of 2007

(on appeal from HCB NO. 9461 of 2002)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  These were appeals from an order of Kwan J given on 9 January 2007 whereby the judge ordered that the 3 summons issued by the trustee in bankruptcy of three bankrupts be adjourned to the master and that, similarly, the joint applications for discharge made by the bankrupts and the trustee should likewise be adjourned back to the master to consider the merits of both applications with the guidance of the decision of 9 January 2007.  The judge disallowed the trustee from recovering out of the bankrupts’ estates his costs of and occasioned in the hearing of 20 December 2006 before the judge.

2.  The trustee in bankruptcy appealed the orders remitting the matter back to the master.  He sought an order in each case that the summons issued by himself objecting to the automatic discharge of the bankrupts be allowed and he sought to appeal as to costs.

3.  This court was concerned, for reasons which will emerge, that these appeals were incompetent in view of the stance taken on behalf of the trustee in the court below.  Nevertheless, the court heard the matter on a de bene esse basis.  The court considered that not only were there no grounds for appeal but the appeals should never have been brought.  The appeals were therefore dismissed.  The costs of the appeals of both the Official Receiver and the respondent to CACV 30 of 2007, who was represented in this court by counsel, were ordered to be paid by the trustee on an indemnity basis.  The trustee was not to recoup the costs of the appeals from the estates.  Furthermore, in view of the fact that the trustee conceded that he did not wish the interim suspension of the automatic discharge under section 30A(1) and (2) of the Bankruptcy Ordinance Cap. 6 (“the Ordinance”) to continue, those orders were discharged.

The history of the applications

4.  The three cases had a similar history.  The bankruptcy orders were made in 2002 at a time, it might be said, when that there were a large number of bankruptcies.  The trustee was appointed trustee in each of the cases.  Under the provisions of section 30A(1) and (2) of the Ordinance, the bankrupts were due to be discharged four years later.  However, the trustee made an application by summons before the master under the provisions of section 30A(3) of the Ordinance that the relevant period should cease to run in each of the cases.  If those applications had been successful it would have meant that the period of the bankruptcies would have been extended.  The bases of those applications were, under section 30A(4)(d), that the conduct of the bankrupts before the commencement of the bankruptcies was unsatisfactory.  The trustee relied on the fact that not only had the bankrupts obtained credit which, on the trustee’s submission, they could never have hoped to have repaid, but they had done so by failing to reveal their other borrowings despite the fact that they were under an obligation to do so.  It was the trustee’s submission that the bankrupts’ conduct was unsatisfactory quite apart from any question of fraud.  In one instance it was said that the bankrupt had failed to comply with a direction of the trustee.

5.  Before those applications came to be heard two events occurred.  In the first place the trustee obtained temporary orders that the periods under section 30A(1) and (2) should cease to run.  In the second place there were applications by consent summons in each case that, pursuant to section 30A(9) of the Ordinance, the bankrupts should be automatically discharged subject to conditions.  Those conditions were in each case the payment of a monthly sum which varied in each case for periods which varied.  In each case, however, part of the order sought was that the bankrupt would pay the trustee $30,000 as a contribution to the costs of the application to object to the discharge and that the trustee would have leave to withdraw the application to object to the automatic discharge.

6.  When the matter came before the master he considered that it was necessary to seek the court’s guidance.  He formed that view partly because there appeared to be a significant number of similar cases where the same course was followed.  The master was clearly concerned about a number of aspects.  When the matter came before the judge she said that there were four questions which fell to be considered.  Those were:

“(1)      whether section 30A(9) is applicable in the light of the circumstances of these cases;

(2)      whether the conduct of the bankrupt in each case in respect of the period before the commencement of the bankruptcy (obtaining credit when he should have known he would not be able to repay and misrepresentation of his financial position in the loan application) is unsatisfactory and warrants an order under section 30A(3);

(3)      whether a single incident of non-compliance with the direction of the trustee in HCB No. 8779 of 2002 is unsatisfactory conduct after the commencement of the bankruptcy and warrants an order under section 30A(3); and

(4)      whether it is appropriate for the trustee to instruct a firm of solicitors of which he is a partner to handle the applications to object to automatic discharge.”

7.  On the application the judge had the assistance not only of submissions from the Official Receiver but also from anamicus.  The judge went into the matter very carefully and the nub of her decision on the first three points is set out in paragraphs 36 to 38 of her judgment.  For completeness I will set them out here:

“36.      It is important to bear in mind that bankruptcy proceedings are not private litigation between individual parties.  There is a wider public interest involved in the proper administration of the bankrupt’s estate in accordance with bankruptcy law (Official Receiver & Trustee in Bankruptcy of Chan Wing Hing & Anr v. Chan Wing Hing & Anr., supra. at 700J to 701B).  In deciding whether to exercise his statutory power to object to automatic discharge, the trustee has a “quasi-judicial” obligation to discharge and this is performance of a public duty for the public welfare.  Hence, if his application to object should turn out to be unsuccessful, unless his decision in making the application is unreasonable in some respect, he should not be responsible to pay the bankrupt’s costs like an ordinary unsuccessful litigant (Re Campbell, ex parte Official Trustee (1987) 72 ALR 251).

37.       In considering the objection to automatic discharge, the public interest and the demands of commercial morality underpinning the bankruptcy laws must be weighed together with the interests of the bankrupt and his creditors (Totterdell v. Nelson (1990) 97 ALR 341 at 343 to 344; Re Maher & Anr. (1985) 61 ALR 592 at 598; Fletcher’s Law of Insolvency, 3rd ed., para. 11-012).  An application to object to discharge is never treated lightly by the court, it involves looking beyond the interests of the bankrupt and his creditors.  The exercise of the discretion was described in this manner by Smithers J of the Federal Court of Australia, General Division Bankruptcy District of the State of Victoria in Re Zion; Ex parte: The bankrupt, unreported, 26 September 1986, at para. 6:

“In my view it is the policy of the law that bankruptcy should in most cases come to an end at three years and when there is an objection at the end of five years from the decree for sequestration of the estate, but that in a case where public interest so requires the discharge may be delayed or made conditional according to the requirements of the public interest in the circumstances of the case.  Public interest will require that a discharge be delayed or made conditional if the conduct revealed or the character of the bankrupt indicates that the return of the bankrupt to the commercial world in full freedom might involve unacceptable risk to persons likely to be engaged in commercial relations with him in the future.  In other words, it is for the applicant to show that balancing the policy of the law in favour of the return to commercial life of a bankrupt against the dangers that might accrue to the public from full commercial capacity of the applicant, it is appropriate that the discharge be granted.”

38.       In my view, the approach and mechanism adopted by the trustee are flawed for a number of reasons:

(1)    The trustee should not act too readily in deciding to object to automatic discharge.  In order not to be unduly restrictive, the grounds of objection in section 30A(4) have been broadly framed and cover a wide variety of situations.  It is not appropriate to object merely because there is a ground which comes within one of the provisions in section 30A(4).  The discretion to object should be exercised with caution.  Where the misconduct is minor or the default is not flagrant or is just an isolated instance, the trustee should consider not objecting to automatic discharge in the first place.  The present approach would appear to suggest that a summons of objection would be issued when a ground could be framed under section 30A(4).  Hence, the substantial number of applications to object to discharge filed by the trustee – 150 out of 360 cases in which he was appointed during June 2002 to January 2003.  It is only when the bankrupt’s proposal of continued contribution is acceptable that the trustee would consider whether the default is not so flagrant as to justify a discharge on conditions.

(2)    An order of continued contribution to the estate as a condition to discharge should be made with restraint and circumspection.  As mentioned earlier, rehabilitation in the sense of enabling the bankrupt to resume a normal life in society is a key consideration of the bankruptcy legislation.  Where continued contribution is likely to bring about anticipated dividends that would be negligible, the trustee should not use contribution to the estate as leverage to a discharge.  For those cases where the bankrupts were required to make continued contribution for as little as $9,600.00 over two years or $800.00 a month for a year, I am very skeptical if this would be conducive to rehabilitation.  Further, contribution to the costs of the trustee in the objection summons as a condition to discharge is outside the scope of section 30A(9).

(3)    The joint application for discharge subject to condition is as much the trustee’s application as it is the bankrupt’s.  The consent of the bankrupt alone is not sufficient.  Sufficient material should be placed before the court if it is asked to make an order of continued contribution.  This should be similar to that required in an application for an income payments order in section 43E.  There is no reason why there should be a different test for an order of continued contribution.  The court would need to be satisfied that the effect of its order under section 30A(9) would not reduce the income necessary for meeting “reasonable domestic needs”.  If the bankrupt is subsequently unable to comply with the order for continued contribution and is committed for contempt, the problem would only escalate.

(4)    If there were indeed good grounds to object to automatic discharge, the court would need to be cautious in allowing the objection to be withdrawn.  In each of these cases in which a consent summons was filed, the court was not apprised of the circumstances in which the trustee consented to withdraw his objection and why he was of the view it would be appropriate to do so notwithstanding his initial objection to discharge.  Public interest is involved in considering an objection to automatic discharge.  An undertaking by the petitioning creditor’s solicitors not to attend at a debtor’s public examination or to oppose his discharge in consideration of payment of their costs was held to be illegal in Kearley v. Thomson & Anr. (1890) 24 QBD 742.  In In re Shaw [1917] 2 KB 734, the trustee in bankruptcy entered into an agreement with the bankrupt to bind himself beforehand to use his best endeavours to prevent the creditors from opposing the annulment or discharge of the bankruptcy and this was held to be highly improper.  For some grounds of objection, it may be quite inappropriate for the trustee to withdraw his objection even if the bankrupt is prepared to make continued contributions to the satisfaction of the trustee.

(5)    Whilst in these cases the creditors were notified of the trustee’s intended objection to discharge pursuant to section 30A(5), they do not appear to have been informed of the trustee’s proposed withdrawal of his objection and the consent applications.  Mr. Lam submitted that notice of this should also be given to all proving creditors.  I agree.  A creditor may have refrained from filing an objection himself because he assumes that the trustee will make the objection.  Similarly, a creditor, who probably has locus to appear on the trustee’s objection (Re Li Tat Kong [2000] 3 HKC 360 at 369I to 370G), may have chosen not to appear for the same reason.  He should have notice of the trustee’s proposed withdrawal so that he may appear and object to this if he sees fit.”

8.  The judge then went on in paragraph 39 to say:

“39.      For the above reasons, I do not think it appropriate to grant the consent applications at this stage.  Mr. Kerr agreed in that situation, I should adjourn the objection summons and the joint application for discharge on conditions back to the Master, for him to consider the merits of both applications in each case with the guidance in this judgment.  This is the course I will adopt.  It may be necessary for the Master to give directions on the filing of further evidence.”

9.  In the paragraphs of the judgment which followed that, the judge referred to the factors that would be relevant in coming to the conclusion that unsatisfactory conduct before the commencement was a ground on which the court should make an order under section 30A(3).  The judge then went on to point out that the trustee had not given any proper explanation as to why he was of the view that it was appropriate to withdraw his objection to the discharge in each case notwithstanding that his original stance had been that there was a misrepresentation in obtaining credit which showed that there was an unacceptable risk to persons likely to be engaged in commercial relations with the bankrupts in future.

10.  It was in those circumstances that the judge made the order that she did.  In my view the judgment below was careful, precise and sound.

Adjournment of the applications to the master for consideration on the merits

11.  As already indicated, in paragraph 39 of the judgment, the judge referred to the submissions by counsel in relation to the adjournment of the applications back to the master.  That matter arose in the course of argument at the conclusion of counsel for the trustee’s opening.

12.  Although there are grounds for considering that there could be no appeal from the order made by the judge since it was a matter of concession on behalf of the trustee, it might be said that counsel’s agreement to the matters being remitted to the master was predicated on the judge holding against the trustee on at least one point.  It might then be open to the trustee to seek to overturn the judge’s ruling on that point.

13.  Mr Bullett, who appeared on behalf of the trustee in this court, sought to argue that the counsel below had been in error in accepting that the matters should be remitted to the master because there had been no jurisdiction to remit the trustee’s applications under section 30A(3) since the master did not have jurisdiction.  That was a thoroughly bad point.  It was clearly contrary to the views held by the trustee, who was a solicitor, his own firm which had acted for him and his previous counsel, because the trustee had made the applications to the master in the first place.  That is hardly surprising because the provisions of section 99(3)(d) would, when fairly construed, include the master’s power to hear such applications.  There are also grounds for considering that under the provisions of section 99A the master would, in any event, have had power on remission by the court to enquire into the bankrupts’ conduct, dealings and property.

14.  Whatever the true position is, however, the fact remains that the order made by the judge was a case management order.  It was, furthermore, an order requiring the facts to be properly investigated.  It is inconceivable that such an order should be the subject of an appeal.  Should the order ultimately made be contended to have been made in error, an appeal might lie at that stage.

15.  It emerged in the course of argument that the trustee was concerned not so much to set aside the order remitting the matter to the master but was concerned in respect of the implications of some of the matters which had been said by the judge in her judgment.  When that aspect was explored with counsel, counsel was unable to identify any statement made in the judgment which he was prepared to argue was made in error.  Rather the submission was that some of the statements might be misunderstood and be applied wrongly by other courts.  That really only has to be stated for it to be appreciated that the matter was clearly unsustainable.

16.  I would go further.  As the judge alluded to in at least two parts of her judgment, the question as to whether the period of the bankruptcy prior to the automatic discharge under section 30A(1) and (2) should continue to run would appear to be quite a different question from whether conditions should be imposed, and what conditions they should be, under section 30A(9).  Once it has been suggested that the circumstances are such that section 30A(4)(d) come into play then it calls for a full explanation as to why the trustee should change his mind on the matter.  The question as to whether the bankrupt should make further contributions would appear to be very different.

17.  The manner in which these applications have come before the court justifiably led to the concern that the decision to abandon the opposition to the automatic discharge was taken solely on the basis that there would be some further contribution, albeit in some of the cases of almost negligible interest to the creditors, and a substantial contribution to the trustee’s costs of bringing the application to object to the automatic discharge.  On that aspect, it might be observed that this court was told in the course of argument that 37 conditional discharge orders have already been made with the consent of the trustee.  If each order provided for a like amount of $30,000 the total would come to $1,110,000.  If similar consent orders were to be made in the 438 other cases in which the trustee has filed objection to automatic discharge, the amount involved would come to more than $13 million.

18.  In those circumstances there is no question in my mind that these appeals should never have been brought.  On that basis the appeals as to costs would have required leave; that had not been sought or obtained.  Furthermore, it was not argued that the orders as to costs were not within the discretion of the court.  In my view, the judge was correct in coming to the conclusion that the applications under section 30A(9) were joint applications by the trustee and the bankrupts.  The circumstances of the volte face in originally applying that the periods for automatic discharge should cease to run and then seeking to withdraw the applications were not explained to the court.  In the light of that I consider that the judge made the correct order in depriving the trustee of the costs of the hearing before her.

Hon Le Pichon JA:

19.  I agree.

Hon Stone J:

20.  I agree with the judgment of the Vice President.

21.  This was an extraordinary appeal which, even if technically competent, possessed no merit whatever; as Rogers VP has observed, these were appeals which should never have been brought.

22.  I also respectfully associate myself with the view of the Vice President as to the quality of the judgment of Madam Justice Kwan in the court below, whose guidance, in her capacity as bankruptcy judge, had been sought on a referral from the Master of the three cases in issue.

23.  Perhaps the sole redeeming feature of the trustee’s curious decision to appeal the unappealable was to bring into sharp focus that which, hitherto at least, was the apparently frequent practice on the part of the trustee of raising objection to the automatic discharge from bankruptcy, and thereafter seeking to withdraw such objection, via the mechanism of a Consent Summons, upon conditions negotiated with the bankrupt.

24.  Such conditions in effect constituted the ‘price’ for the trustee’s agreement to withdraw the objection, with one these conditions notably making provision for the trustee’s costs of the application to object to the automatic discharge, a practice which in my view afforded ground for justifiable concern and which, to put it at its lowest, contained within it the potential to lessen the criticaldiscrimination which the trustee in bankruptcy must exercise in making a decision as to whether to object to an automatic discharge. 

25.  In this context I agree with the observations of the learned judge in her judgment – see [2007] 1 HKC 164 at 183H-184C – that “the trustee should not act too readily in deciding to object to automatic discharge”, that “the discretion to object should be exercised with caution” and that “an order of continued contribution to the estate as a condition to discharge should be made with restraint and circumspection”.

26.  In the same passage (op cit., at 184E) the judge observes, again correctly in my view, that “contribution to the costs of the trustee in the objection summons as a condition to discharge is outside the scope of s 30A(9)” [of the Bankruptcy Ordinance, Cap 6], an observation which no doubt has had the signal effect of terminating the practice which assumed such high profile in these appeals.