RE LO YIU CHUEN

HCB 14364/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 14364 OF 2009

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D E C I S I O N

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Application

1. This is an application by the Joint and Several Trustees (“Trustee”) under Section 30A of the Bankruptcy Ordinance (“BO”) and Rule 88 of the Bankruptcy Rules (Cap 6) for an order against the automatic discharge of Lo Yiu Chuen (“the Bankrupt”) under Section 30A(3) of the BO.

Background

2. On 8 May 2007, the petitioning creditor obtained a judgment against the Bankrupt and his elder brother after trial in HCA 4762 of 2002 for the sum exceeding HK3.09 million together with interest and costs (“Judgment”).  On 13 November 2009, a petition for bankruptcy was filed and a bankruptcy order was made against the Bankrupt on 20 January 2010.

3. The Trustee makes the application mainly on the ground that the conducts of the Bankrupt before the commencement of his bankruptcy were unsatisfactory under section 30A(4)(d) of the BO and the followings facts are relied on:

(a)  the Bankrupt entered into a transaction to dispose of his interest in a property (ie 2/5^th shares in Workshop A and B, Ground Floor, Wing Hong Factory Building, No 18-26 Kwai Fung Crescent, Kwai Chung (“Property”)) to Able Century Group Ltd just 3 days after the date of the Judgment at HK$2,080,000 (“Transaction”); and

(b)  the Bankrupt incurred substantial loss from gambling in Macau and used the sales proceeds of the Transaction to pay off the debt of gambling.

4. Regarding the Transaction, the petitioning creditor had commenced legal proceedings to set aside the same in October 2011 under HCMP 1509/2010 (“Avoidance Proceedings”).  The trial is likely to be heard in 2015.

5. The Bankrupt is now 48 years old, divorced.  The Trustee only realized $65,187.50 from the Bankrupt’s estate.

Legal Principles

6. It is not disputed by the parties’ Counsel that the court shall adopt a 2-stage approach[1]. First, the court has to determine whether the conduct complained of is unsatisfactory within the meaning of section 30A(4)(d) of the BO and if yes, then, the court has to consider whether to exercise the discretion under section 30A(3) to suspend the running of the relevant period in the light of all the circumstances.

7. As to what conduct is regarded as unsatisfactory, the appropriate test is whether the conduct is such as society would be prepared to condone without any expression of disapproval[2]. In my view, it is indeed a hypothetical reasonable man test having regard to all relevant circumstances.

8. It is noteworthy that the Bankrupt did not file any affirmation in opposite but his Counsel relied on other affirmations filed herein and those filed in the Avoidance Proceedings to oppose this application and the Trustee did not apply for an order to cross-examine the Bankrupt.  In my view, the court shall not conduct a mini-trial on affidavit evidence where there are material factual disputes and I have to accept the face value of these affirmations unless they are inconsistent with incontrovertible facts[3].

Discussion

9. To start with, I shall not and do not need to determine any issues or make any findings in relation to the Avoidance Proceedings although the Trustee believes that the Transaction is a sham.  What I need to do is to determine whether the Bankrupt's conducts are unsatisfactory within the meaning of section 30A(4)(d) of the BO.  Accordingly, I disagree with the submission of Mr Wong, Counsel for the Bankrupt, that there is any risk of estoppel or res judicata.

10. Concerning the Transaction, Mr Wong, Counsel for the Bankrupt, submitted that there is no evidence before me that the Bankrupt was insolvent at the time of the Transaction.  I disagree since the Trustee could only realize $65,187.50 from the Bankrupt’s estate.  Taking into account of the debt due under the Judgment in 2007, it is very likely that the Bankrupt was insolvent at that time.  Even if Mr Wong’s submission may be correct, I still consider that upon knowing the Judgment being entered against him, the Bankrupt's conduct of selling all his interest in the Property after 3 days thereafter is unsatisfactory.

11. The Bankrupt alleged to use the sales proceeds of the Transaction to pay off the gambling debt of HK3 million which was incurred at Macau in 2005, ie about 4 years prior to the date of the bankruptcy petition.  He did not produce any document to support his allegation.  There is no evidence before me that he was addicted to or had the habit of heavy gambling.  I am of the view that should he not incur such huge gambling debt, he may be able to pay off substantial part of the Judgment.  Hence, his conduct of incurring huge gambling debt shall not be condoned by the society without any expression of disapproval and is therefore considered unsatisfactory[4].

12. I agree that the Bankrupt's conduct of paying off the gambling debt may not amount to unfair preference under section 50 of the BO.  However, it does not mean that such a conduct is not unsatisfactory.  The Bankrupt preferred to pay off the debt due to “疊馬仔” (casino middleman) in Macau rather than the other ordinary creditors including the petitioning creditor.  I am of the view that the society would not be prepared to condone such a conduct, which is unsatisfactory.

13. The Trustee also complained that the Property was leased to On Kee Metal Company (“On Kee”), of which Queenie Lau Chau Mei, the ex-wife of the Bankrupt, is the sole proprietor.  Pursuant to the tenancy agreement made on 25 May 2007, the terms of lease is for 12 years at the monthly rent of HK$6,000 and the rental for the whole period of 12 years totaling HK$864,000 was paid to the elder brother of the Bankrupt in advance upon signing.  Further, On Kee is entitled to sub-let the Property and to have an extension of 10 years at the same rent.

14. Mr Chan, Counsel for the Trustee submitted that this tenancy makes no commercial sense.  Although Mr Wong, Counsel for the Bankrupt referred me to the affirmation of Cheng Bingjin, in which he said that it made sense to ensure On Kee’s continued occupancy of the Property, I still think that it is extremely unusual for the landlord to let the premises to a tenant for such a long period of time without increment of rent.  More surprising is that On Kee is expressly granted permission of sub-letting.

15. On balance of probability, I am satisfied that the Trustee has proved the grounds of objection to discharge the bankruptcy.

16. The next issue is exercise of the discretion to suspend the automatic discharge.  The 2 main objectives have to be considered by the court are[5]:

(a)  The rehabilitation of the bankrupt by allowing him to resume a normal life in society.

(b)  The public interest of ensuring that the return of the bankrupt to the commercial world will not carry with it the unacceptable risk to persons likely to be engaged in commercial relations with him and also that commercial morality is preserved.

17. I bear in mind that there is no complaint of the conducts of the Bankrupt after the commencement of his bankruptcy.  He did make $3,000 monthly contribution out of his monthly earning of $10,000.

18. Nevertheless, I am of the view that his unsatisfactory conducts warrants a suspension and that a period of 6 months is appropriate to mark the court’s disapproval of his pre-bankruptcy conducts.  Accordingly, I exercise my discretion to order that the automatic discharge of the Bankrupt be suspended for 6 months and that the relevant period under section 30A(3) of BO shall cease to run for a period of 6 months from 19 January 2014.

19. I see no reason why the costs shall not follow event.  I make an order nisi that the Bankrupt do pay costs of this application to be taxed if not agreed with certificate of counsel, which shall become absolute unless any of the parties apply to vary it within 14 days.