RE: CHAN CHUN LAM t/a Kwok Lam Trading Development Co. and EX PARTE: OFFICIAL RECEIVER

HCB 287 of 1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 287 OF 1996

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D E C I S I O N

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1. This is an application by the Official Receiver and Trustee ("the Trustee") taken out on 3 January 2001 objecting to the automatic discharge of the bankrupt Mr. Chan Chun Lam ("Mr. Chan"). The application is made under section 30A of the Bankruptcy Ordinance, Cap. 6 ("the Ordinance") and the ground of objection is as provided under 30A(4)(d) of the Ordinance, namely that the conduct of the bankrupt, either in respect of the period before or the period after the commencement of the bankruptcy, has been unsatisfactory.

2. Mr. Chan opposed the application by the Trustee. After hearing submissions by the parties, I ordered, at the conclusion of the hearing on 8 June 2001, that the automatic discharge of Mr. Chan be suspended for 4 years. I said I would hand down my reasons for decision later, and these are my reasons.

Background

3. The bankruptcy petition against Mr. Chan was presented on 13 June 1996. On 8 January 1997, a receiving order was made. This was followed by an adjudication order made on 20 February 1997. On the same date, the Official Receiver was appointed Trustee in bankruptcy.

4. On 1 April 1997, Mr. Chan attended the Trustee's Office for a preliminary interview. At the interview, Mr. Chan was advised, amongst other things, that being an adjudged bankrupt he could not act as a director. On 18 July 1997, a statement of affairs was filed. The proofs of debt submitted amount to $1,375,977.39 which excluded the claim by the petitioner in the sum of $125,000.00. Assets amounting to $11,686.95 were recovered from the estate by the Trustee.

5. On 19 March 1999, the Trustee received a letter from a Messrs. Livasiri & Co., a firm of solicitors, informing the Trustee that their client, a Yick Tung (China) Bonded - Warehousing & Trading Company Limited ("Yick Tung") had a claim against Mr. Chan as a guarantor for $168,255.08 being the outstanding contract prices due from a Primewin International Industrial Limited ("Primewin"). The Trustee was further advised that Mr. Chan had failed to disclose to Yick Tung that he was an undischarged bankrupt when he provided the guarantee to Yick Tung.

6. Following the letter received from Messrs. Livasiri & Co., the Trustee conducted investigations on Mr. Chan. It was discovered that Mr. Chan did not have any direct relationship with Primewin, but his wife, a madam Lo Kam Seung ("madam Lo"), was one of the directors and shareholders of Primewin. It was further discovered that after being adjudicated bankrupt on 20 February 1997, Mr. Chan had not resigned from his directorships with a Sennell Enterprises Limited ("Sennell") and a Master Sound Industrial Company Limited ("Master Sound") despite that he had been advised to do so when he attended the interview on 1 April 1997. Subsequent information further revealed that Mr. Chan was a director of a Foundation International Finance (HK-Macau) Company Limited ("Foundation"), but again he failed to disclose the matter to the Trustee during the interview.

7. Various efforts had been made by the Trustee to contact Mr. Chan to assist in the investigation of the matters above but to no avail. Indeed, after Mr. Chan had filed his statement of affairs on 18 July 1997, Mr. Chan had failed to keep in touch with the Trustee. The Trustee was unable to contact Mr. Chan despite various attempts made through known addresses and telephone numbers. There was a period of no communication between the Trustee and Mr. Chan for about 31/2 years. It was not until 21 December 2000 that Mr. Chan attended the Trustee's Office to enquire about his automatic discharge. He was then advised that the Trustee would raise objection to his automatic discharge.

The Ground of Objection

8. As stated above, the ground of objection is based on section 30A(4)(d) of the Ordinance namely that before or after the commencement of the bankruptcy, the conduct of Mr. Chan has been unsatisfactory. In support of the application, the Trustee has filed 3 reports. Mr. Chan, who is represented by Messrs. Fung, Law & Ng, Solicitors, filed 2 affirmations in opposition. His wife madam Lo has also filed an affirmation in support of Mr. Chan's opposition.

9. In the reports filed in support of the application, the Trustee has identified several instances of unsatisfactory conduct. I shall now turn to these unsatisfactory conduct and the explanations given by Mr. Chan. However, before I do that, I should mention that in January 2001, Mr. Chan was prosecuted for acting as a director of Foundation without the leave of the court contrary to sections 156(1) and 351(1A) of the Companies Ordinance. He pleaded guilty to the charge and was fined $5,000. At the hearing, Mr. Glen, solicitor for the Trustee, confirmed with the court that the Trustee would not rely on the criminal conviction of Mr. Chan as an additional ground of objection.

Instances of unsatisfactory conduct

- Providing guarantee to Yick Tung

10. Mr. Glen for the Trustee submitted that Mr. Chan knew that he should not act as a guarantor, but despite that, he gave a guarantee to Yick Tung without disclosing that he was an undischarged bankrupt. Mr. Glen said this amounts to unsatisfactory conduct.

11. In the Affirmation of Mr. Chan filed on 7 February 2001, he explained that when he signed the guarantee, he had forgotten about the reminder of the Trustee that he could not act as a guarantor. He stated that he did not purposely sign the guarantee to obtain the grant of loan for Primewin. Miss Lam, solicitor for Mr. Chan, further argued that the guarantee signed by him was not an inducement for the grant of loan as prior to the signing of the guarantee, the goods had already been delivered to Primewin by Yick Tung. The guarantee was signed merely for the purpose of granting more indulgence to Primewin to settle the price for the good.

12. I cannot agree with the submission of Miss Lam. In the first place, Mr. Chan, as an undischarged bankrupt, should not have given any guarantee at all. His explanation that he had forgotten about the reminder of the Trustee is totally unacceptable. In my view, the giving of guarantee cannot be swept aside as a simple forgetfulness. It is a very serious matter. It tantamounts to a "deception" on Yick Tung as at the time of the giving of such guarantee, Mr. Chan knew that as an undischarged bankrupt, his guarantee would worth nothing and could not be honoured.

13. In respect of the argument that the guarantee was not an inducement for a grant of loan by Yick Tung, I do not agree. As pointed out by Mr. Glen, there is no evidence to show that Yick Tung had not been induced by the guarantee. Furthermore, had the true fact that Mr. Chan was an undischarged bankrupt been revealed to Yick Tung, I am quite certain the Yick Tung would not have accepted the guarantee by Mr. Chan as it would be worthless and of no value. In such circumstances, Yick Tung might have taken a different course of action against Primewin in respect of upaid price for the good. In my judgment, the conduct of Mr. Chan above is unsatisfactory.

- Acting as Director for 3 Companies

14. It is the Trustee's case that Mr. Chan had been advised to resign from his directorships with Sennell and Master Sound. He was further advised that he should not, as an undischraged bankrupt, act as a director. But contrary to what he had been told, Mr. Chan incorporated a new company known as Foundation and acted as its director. It should be noted that Mr. Chan admitted in his affirmation that he incorporated Foundation and this was on 17 January 1997 which was after the receiving order was pronounced against him on 8 January 1997 and 3 days before the adjudication order was made. Further, and contrary to the advice of the Trustee, Mr. Chan had failed to resign as director of Sennell and Master Sound. He even signed on the annual returns for Foundation and Sennell. Mr. Glen contended that they all amount to unsatisfactory conduct.

15. In response to the above, Mr. Chan offered the following explanations. He stated that he had agreed to incorporate and act as a director of Foundation because a Mr. Sun and a Mr. Wu requested him to do so. They had promised to engage him as a sales executive which would enable him to obtain more business connections.

16. In respect of his resignation as director, he stated that he was not able to resign as director of Sennell and Foundation because he was under a wrongful belief that his resignation would require the assistance of Mr. Sun and Mr. Wu. He thought he could not resign without their signatures. But as he was not able to locate them, he could not arrange and proceed with the resignation.

17. As for the directorship of Master Sound, he explained that he had mixed up Master Sound with another company called Master Wide Industrial Limited ("Master Wide"). He said that Master Wide shared the same structure as Master Sound. As Master Wide was wound up by the court, he was under a misconception that Master Sound would be automatically wound up with Master Wide and that he needed not arrange his resignation as director of Master Sound.

18. On the annual returns, Mr. Chan explained that the annual returns were signed on the request of a Juleus Lee & Co. and a Woodland Secretaries Co. Ltd. which were respectively the accountant firm and Secretary Company of both Sennell and Foundation. He said that he signed the annual returns because he thought that the signing of annual returns was merely a procedural matter and in any event, Foundation and Sennell were only shelf companies with no business for a long time.

19. I must say that I cannot accept Mr. Chan's explanations above. He was advised that he should not act as a director, but in defiance of the law and despite a receiving order had been made against him, he incorporated Foundation and acted as its director without informing the Trustee. Further and despite the advice of the Trustee, he failed to resign as a director of Sennell and Master Sound. He even signed on the annual returns. All these show that Mr. Chan never took the advice of the Trustee seriously nor did he intend to observe the obligations imposed on a bankrupt. In my view, it is a blatant disregard of the law on the part of Mr. Chan.

20. Regarding Mr. Chan's failure to resign as directors of Sennell and Foundation, I find his explanation as not credible. The alleged "wrongful belief" is just an excuse put up by Mr. Chan. He was advised by the Trustee to resign from his directorships, if Mr. Chan really did not know what steps he should take to resign as director, one would expect Mr. Chan to seek assistance from or make enquiry with the Trustee or even from the accountant firm or secretary company that he referred to in his affirmations. After all, it was the Trustee who advised Mr. Chan to resign from the directorships. However, I find it surprising that despite the advice of the Trustee, Mr. Chan chose not to do anything but to wait until he could locate Mr. Sun and Mr. Wu. As pointed out by Mr. Glen, Mr. Chan could resign simply by filing a return. In my view, Mr. Chan's explanations are not acceptable and his conduct above is also unsatisfactory.

- Failing to keep in touch with the Trustee

21. It is the case of the Trustee that after Mr. Chan had filed his statement of affairs in July 1997, he had failed to keep in touch with the Trustee nor had he disclosed to the Trustee the change of his address. Mr. Glen stated in his report that during the course of the bankruptcy, the Trustee had made extensive efforts to contact Mr. Chan for him to assist in the administration of the estate especially after the Trustee had received a complaint from Yick Tung's solicitors. But all these efforts were in vain. According to Mr. Glen, the Trustee had written to Mr. Chan to eight different places but all the letters written were returned.

22. Mr. Glen further pointed out that on 1 April 1997, a copy of "Simple Guide to Bankruptcy" was handed to Mr. Chan and he had acknowledged receipt of the Guide. It is stated under paragraph 16 of the Guide that a bankrupt is required to inform the Trustee of any change of name, address and telephone number. Mr. Chan failed to comply with such obligations.

23. Mr. Glen submitted that Mr. Chan was trying to avoid the Trustee. He said that after Mr. Chan had filed his statement of affairs on 18 July 1997, he made no effort to contact the Trustee until it was convenient for him to do so, that is, when he came to the Trustee's office on 21 December 2000 to inquire about automatic discharge.

24. In response to the above, Mr. Chan explained that after he was adjudicated bankrupt, he was not able to obtain any employment. It was not until late 1997 that he began to work for Primewin as a part time salesman. The job required him to stay in the Mainland most of the time. He said that because of the bankruptcy, he had suffered from emotional problem. He became depressed and temperamental. At one stage, he had thought of committing suicide. It was only with the support and encouragement of his wife that he decided to live and start anew in the Mainland. He stated that he had not kept in touch with the Trustee because he was under a misapprehension that after he had filed his statement of affairs, everything would be settled and that he would not be required to keep in regular contact with the Trustee.

25. Mr. Chan denied that he was trying to avoid the Trustee. He explained that he had not notified the Trustee of the change of his address because before and after he was adjudicated bankrupt, the debt collectors had persistently disturbed his family. As to the "Simple Guide of Bankruptcy", he explained that he had received the Guide but he had not paid attention to its contents.

26. In my view, the explanation given by Mr. Chan above is far from satisfactory. The fact that his family had been disturbed by debt collectors has nothing to do with his obligations to keep the Trustee informed of his change of address. In fact, if Mr. Chan was harrassed by the debt collectors, he should have informed the Trustee of such a problem so that the Trustee may take appropriate action, for example, to inform the creditors that Mr. Chan was a declared bankrupt. However, in Mr. Chan's explanation, he seems to equate the Trustee with the debt collectors on the question of change of address. This is hard to understand.

27. As a bankrupt, Mr. Chan is under an obligation to keep in touch with the Trustee so that the Trustee is fully informed of any change of his financial position, for instance as to whether he was in gainful employment; and whether there was any change in his income and assets which may be utilised to repay the creditors. On the evidence before the court, Mr. Chan had made no attempt whatsoever to keep the Trustee informed of his whereabouts. He simply did not bother to contact the Trustee. As a result, the Trustee was kept in the dark as to what Mr. Chan was doing since 18 July 1997 when he filed his statement of affairs up to 21 December 2000 when he went to make enquiry with the Trustee about the automatic discharge. I find such conduct of Mr. Chan as unsatisfactory.

- Failing to disclose his interest in Shenzhen Kwok Lam Electronics Co. Ltd.

28. Mr. Glen submitted that Mr. Chan had failed to disclose his interest in a Shenzhen Kwok Lam Electronics Co. Ltd. in the Mainland ("the Shenzhen Company"). The documents showed that Mr. Chan was its Director and General Manager. Mr. Glen contended that not only had Mr. Chan failed to disclose his interest in the Shenzhen Company in his statement of affairs, but also he had failed to disclose his business activities during his stay in the Mainland. It should be noted from exhibit "JG-2" attached to the 2nd report of the Trustee that the Shenzhen Company has a registered capital of US$2.5 million.

29. In reply to the above, Mr. Chan simply admitted that the Shenzhen Company commenced business in 1995 which was before the receiving order was made against him. However, he said that the Shenzhen Compnay had made no profit and was wound up in 1999.

30. I find the explanation given is oversimplified and unsatisfactory. To begin with, Mr. Chan had not explained why he had not disclosed such interest in his statement of affairs filed on 18 July 1997 bearing in mind that he was involved in the Shenzhen Company even before he was adjudicated bankrupt. Mr. Chan had also failed to disclose in detail his interest in the Shenzhen Company nor did he account for the business activities operated by this Shenzhen Company. I find such conduct unsatisfactory.

The Decision

31. At the hearing, the court was referred to the Law Reform Commission Report on Bankruptcy especially to paragraphs 17.16 and 17.24 which set out the rationale behind the provisions for automatic discharge. These two paragraphs were also referred to in the judgment of Mrs. Justice Le Pichon (as she then was) in Re Hui Hing Kwok [1999] 3 HKC 683. Paragraphs 17.16 and 17.24 read as follows:-

"17.16 The introduction of automatic discharge should, with the objection system, have tow-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."

32. Relying on paragraph 17.16 above, Miss Lam contended that Mr. Chan should be given a chance to rehabilitate and to resume a normal life in the society. She further cited the comment of Mrs. Justice Le Pichon in Re Hui Hing Kwok (supra) where she states at p. 687 that:-

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

33. Miss Lam submitted that the unsatisfactory conduct complained of was excusable as it was caused by Mr. Chan's own wrongful belief, ignorance and inadvertent neglect. She urged the court not to suspend the discharge.

34. Under section 30A of the Ordinance, the court has a discretion to suspend the automatic discharge. But having considered the conduct complained of, I am not prepared to exercise the discretion in favour of Mr. Chan.

35. On the evidence before the court, I find and accept that the conduct of Mr. Chan after the commencement of the bankruptcy has been unsatisfactory. I have great reservations regarding the explanations given by Mr. Chan. Further I am of the view that Mr. Chan has not given a full and frank disclosure of his financial affairs especially on his interests in the Shenzhen Company; his business activities in the Mainland and his true relationship with Primewin bearing in mind that his wife was its director and shareholder. Indeed, the fact that his wife was the director and shareholder of Primewin was not even disclosed by Mr. Chan in his 1st affirmation filed on 7 February 2001.

36. As pointed out by the Mr. Glen, eversince the commencement of his bankruptcy, Mr. Chan had made no attempt to keep the Trustee informed as to his financial status. No evidence has been produced to show the income he received from Primewin nor from the Shenzhen Company. Indeed, if the Trustee had not received the documents relating to the Shenzhen Company from a third party, I doubt very much that Mr. Chan would on his own volition disclose his interest in the Shenzhen Company. I should mention that up to the present, Mr. Chan still has not explained why he had not disclosed such interest in his statement of affairs. I think the Trustee should take steps to make a more in-depth investigation of Mr. Chan's financial affairs.

37. To conclude, I am satisfied that the conduct of Mr. Chan above warrants a suspension of the discharge. Mr. Chan had paid no regard to the law nor the obligations of a bankrupt. After he was adjudicated bankrupt, he continued to act as a director of Sennell and Master Sound despite he was advised to resign as directors. Again, despite the receiving order made against him, he incorporated a new company (i.e. Foundation) and acted as its director. He continued to sign annual returns for companies and even gave a guarantee to Yick Tung. He was in effect conducting his affairs as if he was not a bankrupt at all. Further, apart from filing a statement of affairs, he never kept in touch with the Trustee nor notified the Trustee as to his change of address. The Trustee lost contact with him for about 31/2 years. If not for his enquiry of the automatic discharge, I doubt very much that Mr. Chan would take the initiative to contact the Trustee regarding his bankruptcy matters. In view of his conduct, it would not be in the interest of commercial morality (see per Fry LJ in Re Hester (1889) 22 QBD 632 at 641 and cited by Mrs. Justice Le Pichon, as she then was, in Re: Li Tat Kong in HCB 741 of 1995, unreported) nor in the public interest to discharge Mr. Chan. And having regard to all the matters, I am satisfied that there are failings on the part of Mr. Chan which justify the delay of his rehabilitation. His unsatisfactory conduct warrants a suspension of the maximum period. Accordingly, I order that the automatic discharge of Mr. Chan be suspended for 4 years and that Mr. Chan shall not be discharged until 20 February 2005.

Costs

37. As Mr. Glen did not seek for costs of this application, I make no order as to costs.