XCHRX In re WU KIT PING STELLA t/a LEE YUEN ELECTRICAL CO.

1993, No.B21

_______________

H E A D N O T E

_______________

Charging Order imposed on property of bankrupt before Receiving Order - chargee had notice of insolvency and act of bankruptcy - creditor of bankrupt successfully applied to set aside Charging Order - Creditor now applies for priority payment under s.38(5B) and s.97(1) of Bankruptcy Ordinance, Cap.6 and inherent jurisdiction in consideration of risk run in setting aside the Charging Order - s.38(5B) to be constructed strictly - incurring legal costs not "payment of monies" in protecting or preserving assets - power under s.97(1) confined to dealing with priorities according to provisions of Bankruptcy Ordinance and the law and not create priorities - case not within both s.38(5B) and s.97(1) - application dismissed.

1993, NO.B21

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

__________

_______________

D E C I S I O N

_______________

1. This is an application for advantage or priority payment pursuant to s.38(5B) and s.97 of the Bankruptcy Ordinance, Cap.6 and the inherent jurisdiction of the court. The applicant is a creditor of the Bankrupt. The Official Receiver naturally opposes the application. The bankrupt is absent and not represented.

2. The events leading to be present application are as follows. On 14th November 1992, one Kin Ming Radio and Electric Company ("Kin Ming") issued a writ of summons in High Court Action No. A7920 of 1992 against one Miss Stella Wu who was then not yet declared bankrupt. On 9th December 1992, Kin Ming obtained default judgment against Miss Wu for the sum of over $2.6 million. Based on that judgment, Kin Ming was granted a Charging Order Nisi against Miss Wu's property in Shatin on 15th December 1992. The Charging Order Nisi was made absolute on 31st December 1992. Both the Order Nisi and Order Absolute were registered at the Land Office. On 11th January 1993, the applicant filed a Bankruptcy Petition against Miss Wu. A Receiving Order was granted on 17th February 1993. Both the Petition and the Receiving Order were registered on 10th February 1993. The Order of Adjudication was made on 18th May 1993.

3. After the filing of the Bankruptcy Petition, the Official Receiver entered into correspondence with the solicitors of Kin Ming. In a letter dated 29th January 1993, the Official Receiver informed them that if Kin Ming had notice of the petition of bankruptcy or the commission of any available act of bankruptcy, the Charging Order obtained by them would not give them any priority. By a reply dated 1st February 1992, the solicitors for Kin Ming informed the Official Receiver that their client did not have notice of any petition or act of bankruptcy. In the absence of any evidence to the contrary, the Official Receiver apparently had to accept that answer. So on 3rd February 1993, the Official Receiver wrote to the solicitors agreeing that the Charging Order obtained by Kin Ming should have priority.

4. It was not until sometime in May 1993 that the applicant discovered the existence of the Charging Order. On 26th May 1993, the solicitors for the applicant wrote to the Official Receiver providing the latter with some information. The letter said that sometime on 1st November 1992, some of the creditors of Miss Wu had made reports to the Shatin Police Station against Miss Wu for alleged deception. Both the applicant and Kin Ming were amongst the informants. It was known to all of them that the total amount of debt exceeded $10 million and that Miss Wu was suspected to be unable to pay her debts and had absconded. They also said that the matter was widely reported in the newspapers. The solicitors for the applicant asked the Official Receiver whether the Official Receiver would consider to apply to join as a party to the Charging Order proceedings and to make an application to set aside or discharge the Charging Order. There was apparently also a conversation between the solicitors for the applicant and the Official Receiver before this letter of 26th May. For some reason, probably because of lack of confirmation on such information, the Official Receiver replied to the solicitors on 1st June 1993 saying that the Official Receiver had no objection to the applicant's intended action, but did not intend to apply to join as a party in the said action. The applicant went ahead and issued a summons on 17th June 1993 to set aside the Charging Order. Meanwhile the property under charge was sold by auction by the mortgagee bank which was requested to withhold the balance of the sale proceeds pending determination of the application to set aside the Charging Order.

5. On 25th June 1993, the solicitors for the applicant informed the Official Receiver that the application to set aside was adjourned for argument on a date to be fixed. They also sent a copy of Kin Ming's affirmation in opposition to the Official Receiver. By a letter dated 1st July 1993, the Official Receiver wrote to the solicitors for the applicant informing them that when the Official Receiver previously corresponded with the solicitors for Kin Ming, there was no available information as to whether Kin Ming had notice of any available act of bankruptcy. However the Official Receiver also said that if the allegation of the applicant could be proved, it was arguable that Kin Ming might have had notice of an available act of bankruptcy. The applicant was requested to a provide further instruction as to the allegation. It is only fair to point out that the Official Receiver in this letter did suggest that the fixing of the hearing date for argument should be deferred until the matter was sorted out. However, before the matter was actually sorted out, the Official Receiver wrote again on 2nd July 1993 to the solicitors for the applicant telling them that he had come to the view that Kin Ming did not have notice of an available act of bankruptcy before the making of the Charging Order and that Kin Ming might retain the benefit of the Charging Order. In the same letter, the Official Receiver however pointed out that the bankrupt's abscondment might amount to an act of bankruptcy and that Kin Ming might be aware of that. Notwithstanding that last comment, the Official Receiver wrote: "Please keep us informed of the outcome of the hearing which, I believe, will be restored by the parties in due course." After that, the solicitors for applicant restored the application for hearing on 20th August 1993. They further wrote to the Official Receiver setting out their arguments and requested the Official Receiver to file an affidavit to explain the circumstances under which he agreed that the Charging Order should have priority. The letter also informed the Official Receiver of the adjourned hearing date. On 7th July 1993 the Official Receiver replied that he was not prepared to file any affidavit. On 14th July, the solicitors for the applicant enclosed some newspaper cuttings to the Official Receiver regarding the earlier report to the Police. Their communication apparently stopped there and the solicitors for the applicant went ahead with the preparation for the hearing on the application.

6. The Official Receiver had obviously carried out some investigations. The bankrupt was asked to attend the Official Receiver's Office and she made a declaration on 17th July 1993 to the effect that Kin Ming had knowledge of her insolvency prior to the making of the Charging Order. So on 2nd August 1993 the Official Receiver rang up the solicitors for the applicant about this matter and asked whether the applicant was prepared to indemnify the Official Receiver for joining in the proceedings for setting aside the Charging Order. However the solicitors for applicant, having gone this far, refused to give the indemnity and indicated that if they were successful in setting aside the Charging Order, they would also apply for preferential or priority payment. After this telephone conversation, the Official Receiver wrote to the solicitors for Kin Ming informing them of the situation and asking for the Charging Order to be set aside. It seems that on 12th August 1993, Kin Ming wrote to the Official Receiver indicating that they agreed to discharge the Charging Order. On 17th August 1993, the Official Receiver wrote to the solicitors for the applicant and formally asked them if they were prepared to let the Official Receiver take over the conduct of the application for setting aside and to agree to indemnify the Official Receiver for such costs. This the applicant again refused. It is however not clear from the evidence before me whether the Official Receiver had informed the solicitors of the applicant that Kin Ming had already agreed to have the Charging Order set aside. As it turned out, there was a consent order made on 20th August 1993 discharging the Charging Order and giving the applicant costs in the sum of $10,000. After the discharge of the order, the balance of the sale proceeds was handed over by the mortgagee bank to the Official Receiver. The applicant now seeks to have a priority payment out of this amount which is, I was told, in the sum of about $500,000.

7. Counsel for the applicant argued that the case fell within s.38(5B) of the Bankruptcy Ordinance. Even if not, the court still had a discretion under s.97 to deal with any question relating to priorities. It was submitted that the applicant was instrumental to the recovery of the balance of the sale proceeds and had run the risk by making an application to have the Charging Order set aside. They should therefore be rewarded with some priority. They asked for half of the proceeds to be paid to them.

8. On the other hand, the Official Receiver, while acknowledging that the applicant had provided information leading to the setting aside of the Charging Order, submitted that many other creditors had also given useful information. The Official Receiver had to make investigations and not simply rely on any particular piece of information. He could only obtain confirmation after getting a declaration from the bankrupt. It was submitted that S.38(5B) should be given a restricted interpretation. The balance of the sale proceeds could not be regarded as "assets" which could be protected or preserved. The taking of steps to have the Charging Order set aside and thereby incurring costs was not payment of money within the meaning of the section. It was also argued that any priority given to the applicant would prejudice the other creditors generally.

9. As I mentioned during the arguments, I do not wish to find fault on anyone. It seems that on 3rd February 1993, when the Official Receiver agreed with the solicitors for Kin Ming that the Charging Order should have priority, it is only fair to say that he probably did not have the full picture. It is arguable that he should have made further inquiries before giving such a reply. But towards the end of May 1993, when he received the information from the solicitors for the applicant with regard to the knowledge on the part of Kin Ming of any available act of bankruptcy, I should think that he should have caused inquiries to be made. In fact he did. However, pending the outcome of such inquiries, I should think that the Official Receiver should not have replied to the solicitors for the applicant on 1st June 1993 saying that not only did he have no objection to the proposed action by the applicant, he did not intend to join as well. I should think that the Official Receiver should have been more careful this time in not replying in such a way particularly in view of the fact that the information supplied by the applicant seemed to be contradictory to the allegation made by Kin Ming. If it is true that other creditors had also given similar information, I should think that the Official Receiver should not have replied in such an unequivocal way. That reply had left the applicant with no alternative but to pursue what they thought to be the proper thing to do. Hence they took out the application to set aside the Charging Order. The letter from the Official Receiver on 1st July displayed the proper attitude to be adopted. He asked the solicitors for the applicant to defer the matter until everything was sorted out. However quite surprisingly on the following day, he informed the solicitors for the applicant of his "second" thought of the matter and notwithstanding his own comment that Kin Ming might have knowledge of the possible abscondment, he asked the solicitors to inform him of the outcome of the hearing. This, in my view, was tantamount to asking the applicant to proceed with the application on their own. The applicant therefore proceeded to fix a date for the adjourned hearing.

10. It was again proper for the Official Receiver to continue the investigation and finally obtained a confirmation from the bankrupt. I accept that on 2nd August 1993, the Official Receiver had already mentioned about the possibility of taking over the proceedings and asked for an indemnity of costs. However, I would agree that the applicant must have by this stage done all the preparation work and was ready to set aside the Charging Order. I should think that if the application had not been adjourned for argument, or the hearing date had not been fixed as late as 20th August 1993, the application would have been decided and the Charging Order would have been set aside earlier. I also note that although the Official Receiver had managed to obtain the agreement of the solicitors for Kin Ming to set aside the Charging Order, there is no evidence that he had so informed the applicant. In any event, it seems to me that the applicant had not merely provided the Official Receiver with information, it had also take positive action to have the Charging Order set aside. It was led to believe on a least two occasions by the Official Receiver that it had to do it alone. It had certainly run the risk of litigation. And having considered all the evidence, I have come to the conclusion that the applicant was instrumental to or largely responsible for the success in getting back the balance of the sale proceeds. I do not agree that there was no risk in respect of the property and that the applicant should not have started action so soon. The solicitors for Kin Ming had been informed on 3rd February 1993 that the Official Receiver conceded that the Charging Order should have priority. One would have thought that if they had shown this letter to the mortgagee bank, they would have obtained the balance of the sale proceeds without difficulty. It is true that at the end of day the Official Receiver may be able to claim it back at a later stage. But I should think that more costs would have to be incurred.

11. Should the applicant be given an advantage or priority over the other creditors out of the money recovered? On the merits, I think it is only fair that it should provided that it falls within the provisions relied on.

12. The provisions of the Bankruptcy Ordinance relevant to the present application are as follows :

Section 38(5):

Where any assets have been recovered under an indemnity for costs of litigation given by certain creditors, or have been protected or preserved by the payment of monies or the giving of indemnity by creditors, or where expenses in relation to which a creditor has indemnified a trustee have been recovered, the court may, on the application of the Official Receiver or the trustee or any such creditor, make such order as it deems just with respect to the distribution of those assets and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk run by them in so doing.

Section 97(1) :

Subject to the provisions of this Ordinance, the court shall have full power to decide all questions of priorities and all other questions whatsoever, whether of law or fact, which may arise in any case of bankruptcy coming within the cognizance of the court or which the court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case.

13. With regard to s.38(5B), counsel for the applicant relied on the second limb, that is, where any assets have been protected or preserved by the payment of monies.

14. It was argued by the Official Receiver that the balance of the sale proceeds was in the hands of the mortgagee bank and never in the hands of the Official Receiver and it followed that it was not an asset to be protected or preserved. With respect I do not accept this argument. The property was that of Miss Wu, before she was declared bankrupt. If she was not declared bankrupt after the sale of the property by the mortgagee bank, the balance of the sale proceeds should be returned to Miss Wu. This money should clearly be regarded as her asset. As a result of the Receiver Order, if there was no Charging Order, the money should have gone to the Official Receiver for distribution amongst her creditors in accordance with the bankruptcy law. However, because of the Charging Order, that would have priority and the money would then be subject to the charge. But the Charging Order had not changed the nature of the money which had all along been part of the assets of Miss Wu. In my view, the application to set aside the Charging Order was clearly an action to get rid of the charge on the money and was, in every sense of the word, protecting or preserving the assets of Miss Wu, the bankrupt.

15. However, in order to fall within s.38(5B), it must be shown that the assets had been protected or preserved by the payment of monies (or the giving of indemnity by creditors). All the applicant had done in this case was to take proceedings to set aside the Charging Order. It is true that legal costs had been incurred in doing so. Can this be regarded as "payment of monies"? I do not think so. Firstly, s.38(5B) allows the court to give an advantage or priority to one creditor over the others as a "reward" for the risk he has run in recovering, protecting or preserving the assets of the bankrupt for the benefit of all creditors generally. Any advantage or priority to be given to one creditor will certainly have the effect of depriving the other creditors of an equal or appropriate distribution. The court should therefore exercise great caution and not give an advantage or priority so readily to any particular creditor unless the conditions set out in the section are satisfied and it is fair and just to do so. In view of this, I think that the section must be "construed strictly and its terms must not be unduly extended" to avoid opening a floodgate (see p.207, Williams and Hunter on Bankruptcy 19th ed.). Secondly, the term "payment of monies" can be contrasted with the term "cost of litigation" in the earlier part of the section (the first limb). While "payment of monies" can have a wide meaning, I doubt if it is intended to include the payment of the cost of litigation in the context of this provision. What is contemplated by the payment of monies in the protection or preservation of assets are, in my view, payments such as payment to defray Crown Rent, rates or other expenses or payment incurred for the purpose of improving the property or payment to prevent the property from being forfeited or falling into dilapidation. I do not think therefore that the applicant falls within s.38(5B).

16. Section 97(1) at first sight seems to be much wider. Although it begins with "subject to the provisions of this Ordinance", I do not think that it is affected by s.38(5B) which purports to deal only with certain situations. Section 97 confers upon the court the power to decide all questions relating to the bankruptcy, including the question of priorities but only with the aim of "doing complete justice or making a complete distribution of property". Both parties in this application seem to accept that I have the power to give priority under this section. With respect, I have some reservations as to whether this is wholly correct.

17. Section 97(1) gives the court full power to decide all questions of priorities and all other questions, be it of law or fact. This is a wide power indeed. However, in my view, the power only extends to a determination of the priorities of the parties' entitlements in accordance with the provisions of the Ordinance or other areas of the law. The section does not give power to the court to confer upon any particular party any advantage or priority over other parties if such advantage or priority does not exist. To do so is not to decide the question of priorities but to create priorities which the Ordinance or the law has not specified. I do not think this is the object of s.97(1). Nor do I think it is intended to cover situations like the present case.

18. The applicant is in the same position as any ordinary unsecured creditor and does not enjoy any priority. It does not fall within s.38(5B). There is no other provision it can rely on. In these circumstances, much as I commend the applicant for its conduct, I do not think I can invoke s.97(1) to give it something which it does not have under the law or the provisions of the Ordinance. Nor do I think I have the inherent jurisdiction to do so. My powers under the company jurisdiction are basically statutory. The application must therefore be dismissed. In the normal course of event, since the application has failed, the applicant should pay the costs of the Official Receiver. However, in the peculiar circumstances of this case, I do not think it is fair to penalise the applicant in making the present application. I would exercise my discretion and make no order as to costs.