THE TRUSTEE OF THE PROPERTY OF LAW IP PO v. YUEN YIP KAN AND ANOTHER

BANKRUPTCY NO.668 OF 1991

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HEADNOTE

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Bankruptcy - Bankruptcy Ordinance, ss.2, 14, 43, 53 and 97 - Application by Official Receiver to stay proceedings against property of bankrupt - Whether bankrupt's entitlement to share in unadministered assets of residuary estate as next-of-kin under an intestacy amounted to property - Official Receiver Contemplating impeachment of transaction - Stranger to bankruptcy - Bankruptcy question.

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A bankrupt (the Bankrupt) was one of the next-of-kin of his mother ("the Deceased") who died intestate in 1989 leaving a flat ("the flat") as part of her residuary estate. Before any grant of letters of administration, the First Respondent, a relative ("the Relative") of the Deceased brought an action in 1992 against the estate of the Deceased, seeking specific performance of an alleged hand-written agreement ("the Agreement") made in 1983 between the Deceased as vendor and the Relative as purchaser to buy the flat free from encumbrances for $1450,00, of which $100,000 was allegedly paid on the signing of the Agreement and the balance in 1984. There was never a formal Assignment and the Agreement was never registered against the title until 1992. The Bankrupt, with his consent, was made a defendant to the Relative's action by being appointed personal representative of the Deceased's estate pursuant to R.S.C.O.15 r.6A for the purposes of the action. By default, the Relative, on 19th January 1993, got an order for specifce performance requiring the Bankrupt to execute an Assignment of the flat to the Relative free from encumbrances.

An application by the Official Receiver to have the Relative's action stayed under s.14 of the Bankruptcy Ordinance, ("the Ordinance"), pending investigation of the Agreement by the Official Receiver as to whether it was a sham, impeachable by the Official Receiver, was resisted by the Relative on the basis that the Official Receiver lacked jurisdiction since no "property" of the Bankrupt, a residuary legatee under the Deceased's estate, was involved, and no bankruptcy question arose since the relative was a stranger to the bankruptcy.

Held (ordering a stay): (1) Although as a general rule a beneficiary under an intestacy has no legal or equitable property interest in the unadministered assets of the estate (Commissioner of Stamp Duties (Queensland) v Livingstone [1965] AC 694), the beneficiary does, however, have a chose in action to have the estate properly administered and that chose in action amounts to "property" within ss.2, 43 and 53(4) of the Ordinance, sufficient to ground jurisdiction for the Official Receiver to apply for a stay under s.14 of the Ordinance. (2) The entitlement of the Official Receiver to impeach the Agreement as a sham gave rise to a bankruptcy question under s.97 of the Ordinance: Re Hutton [1969] 2 Ch 201 applied. Moreover, the Official Receiver was asserting a higher and better title than the Relative: Ex p Cohen (1871) LR 7 Ch. App 20.

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

NO.668 OF 1991

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J U D G M E N T

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1. Mrs Har Sio Ying, ("the Deceased"), died intestate on 21st April 1989, survived by her son, Mr Law Ip Po, ("Mr Law"), and two daughters, as next-of-kin. Letters of administration have not yet been granted in respect of her estate.

2. At the time of her death, the Deceased was the registered owner of at least two pieces of real estate, namely, a flat on the 5th Floor of No.238, Tung Chau Street, Kowloon, ("the Tung Chau Street flat"), and Flat D, 16th Floor, No.122, Broadway, Mei Foo Sun Chuen, Kowloon, ("the Mei Foo Sun Chuen flat"). At the time of the Deceased's death, both those flats were mortgaged to Sin Hua Trust Savings & Commercial Bank Ltd. ("the Bank"), the Tung Chau Street flat having been mortgaged to the Bank on 11th December 1980 to secure a loan of $150,000 plus interest, and the Mei Foo Sun Chuen flat on 15th April 1987 to secure an advance of $500,000 plus interest. In each case, the mortgage was registered against the title.

3. During the Deceased's life-time, in 1986, one of her two daughters became bankrupt, and has remained so.

4. After the Deceased's death, her only son, Mr Law, became bankrupt, the details, insofar as relevant, being that the petition against him was filed on 10th February 1992, the receiving order was made on 11th March 1992, and he was adjudicated bankrupt on 18th June 1992. He is still a bankrupt.

5. Since none of the principal due under the mortgages on the Deceased's two flats had been repaid and interest continued to accumulate, the Bank, on 25th May 1991, commenced proceedings, MP No.1486 of 1991, ("the Bank's action") by way of Originating Summons against the Deceased's estate for repayment of all monies due, and, if need be, foreclosure on both flats.

6. As there had been no grant in respect of the Deceased's estate, the Bank's action named "The Personal Representative of Har Sio Ying" in the Originating Summons as defendant for the purpose of initiating those proceedings, but, on 5th July 1991, the Bank got an Order under R.S.C.O.15 r.6A appointing Mr Law as personal representative of his late mother, the Deceased, and substituting him as defendant to represent the Deceased's estate for the purposes of the Bank's action. That was done without any cooperation from Mr Law.

7. On 25th May 1991, which was the date the Originating Summons was taken out on the Bank's behalf, the Bank's solicitors caused a copy of that Originating Summons to be posted up at the Tung Chau Street Flat and the Mei Foo Sun Chuen Flat.

8. Two days later, namely, 27th May 1991, the Bank's solicitors received a telephone call from Mr Yuen Yip Kan, ("Mr Yuen"), who claimed he had bought the Tung Chau Street flat from the Deceased, a relative of his, in 1983, free from ehcumbrances.

9. That, no doubt, must have come as something of a surprise to the Bank's solicitors, since there was nothing on the Land Register in respect of the Tung Chau Street flat to show that Mr Yuen had any interest.

10. As already mentioned, the petition for Mr Law's bankruptcy was filed on 10th February 1992 and the receiving order made against him on 11th March 1992.

11. Two days after that receiving order, that is to say, on 13th March 1992, Mr Yuen had an entry made in the Land Register against the title of the Tung Chau Street flat of a handwritten agreement in Chinese, purporting to be made on 20th September 1983 between the Deceased as vendor and Mr Yuen as purchaser, ("the Agreement"), for the purchase of the Tung Chau Street flat for the price of $145,000, of which $100,000 was paid to the Deceased on the date of the Agreement, and the balance some time in March 1984. The Agreement made provision for the Deceased to execute an Assignment to Mr Yuen after 1st July 1984, but there never was any Assignment.

12. According to Mr Yuen, he has had possession of the Tung Chau Street flat since the date of the Agreement.

13. On 1st May 1992, Mr Yuen got himself joined as a defendant in the Bank's action.

14. In due course, on 31st August 1993, the Bank, as mortgagee, sold the Mei Foo Sun Chuen flat for $2.2 million from which, after the Bank took all that was due to it in respect of the loan, interest and costs under the mortgage of the Mei Foo Sun Chuen flat, there remained a balance of $1,375,490 belonging to the estate of the Deceased. The Bank still holds that balance which far exceeds the amount currently owing to the Bank by way of principal and interest in respect of the Deceased's mortgage on the Tung Chau Street flat. For reasons best known to itself, the Bank has so far chosen not to recoup the money owed it under the mortgage on the Tung Chau Street flat from the balance it is holding for the Deceased's estate after redeeming the mortgage on the Mei Foo Sun Chuen flat. The Bank, by a letter dated 10th November 1993, indicated to Mr Yuen's solicitors an intention to take step to foreclose on the Tung Chau Street flat mortgage but, as far as I am aware, has done nothing further since then to put that property on the market.

15. Meanwhile, on 20th October 1992, Mr Yuen issued a writ, 1992 No.A7202, ("Mr Yuen's action") against "The Personal Representative" of the Deceased, seeking an Assignment of the Tung Chau Street flat to Mr Yuen free from encumbrances, which meant that the Deceased's estate would first of all have to redeem the Bank's mortgage on that flat.

16. Being a relative of the Deceased, Mr Yuen was, needless to say, also a relative of Mr Law.

17. Mr Yuen had no problem in getting Mr Law to accept an appointment as the personal representative of the estate of the Deceased for the purposes of Mr Yuen's action, Mr Law having agreed orally as long previously as 12th August 1992 that he would accept. The actual order appointing Mr Law personal representative was made by way of consent on 9th November 1992.

18. Exactly when Mr Law signed it is not clear, but, on 4th January 1993, the Supreme Court Registry received an Acknowledgment from Mr Law that he would not be contesting Mr Yuen's action. Moreover, on 31st December 1992, Mr Law made an affidavit, filed 4th January 1993, exhibiting a statement made by Mr Law on 9th April 1992, confirming that his late mother, the Deceased, had in fact sold the Tung Chau Street flat to Mr Yuen on 20th September 1983 for $145,000 which had been paid, and agreeing that her estate should pay off the Bank's mortgage so that the flat could be assigned to Mr Yuen free from encumbrances.

19. Consistently with his previous conduct, Mr Law, on the 19th January 1993, allowed an Order for specific performance of the Agreement to be made by default in Mr Yuen's action to the effect that the Bank's mortgage on the Tung Chau Street flat should be redeemed by the Deceased's estate, that Mr Law would execute an Assignment in Mr Yuen's favour, and that Mr Yuen's costs in not only his action but also in the Bank's action should be borne by the Deceased's estate.

20. Of Mr Law, an undischarged bankrupt, it can be said that he gives the appearance of being somewhat open-handed towards his relative, Mr Yuen, with assets from the Deceased's estate, two third's of which would, after payment of the Deceased's just debts, otherwise be destined for the Official Receiver in right of Mr Law and his bankrupt sister as two of the only three known next-of-kin.

21. Mr Yuen's solicitor's ascertained from the Bank's solicitors on 4th October 1993 that, as at the 24th September 1993, the amount due to the Bank under the mortgage on the Tung Chau Street flat was $283,280.

22. The next move by Mr Yuen's solicitors in Mr Yuen's action was, on 2nd November 1993, to get a garnishee order nisi against the Bank for the $283,280 redemption monies for the Tung Chau Street flat mortgage to be paid from the balance amounting to $1,375,490 which the Bank was still holding for the Deceased's estate after selling the Mei Foo Sun Chuen flat as mortgagee.

23. Shortly after this, on 26th November 1993, the Official Receiver, who had got wind of what was happening, wrote to Mr Yuen's solicitors, informing them that the Official Receiver was considering making an application to the court to have the order for specific performance dated 19th January 1993 in Mr Yuen's action set aside.

24. Prior to 5th May 1993, the Official Receiver had no knowledge of Mr Yuen's action, and it was not until 13th December 1993 that the Official Receiver came to learn of the nature of those proceedings.

25. The summons before me is one taken out by the Official Receiver in Mr Law's bankruptcy proceedings (No.668 of 1991) to have Mr Yuen's action stayed in general, and, in particular, to stay the pending application for a garnishee order absolute.

26. Why the Official Receiver seeks a stay is clear from his Report of 11th May 1994, in particular, his paragraph 9, and the first sentence of paragraph 10, which I now set out:

"9. The Agreement dated 20 September 1983 was lodged with the Land Office for registration on 13 March 1992, which was 91/2 years after the date of the Agreement and only a few months prior to commencement of the Action by the Plaintiff (meaning, Mr Yuen's action, my parenthesis). The Official Receiver considers the circumstances are such as to require further investigation, and in particular whether the Agreement was entered into on 20 September 1983, or a later dated. The Official Receiver proposes to seek the assistance of the Government Laboratory to establish the age of the Agreement by forensic examination, and whether the Agreement was signed by the deceased by examination by handwriting expert.

10. For reasons set out above, the Official Receiver takes the view that it is necessary to conduct further investigation which will enable the Official Receiver to come to a decision whether to proceed with an application to set aside the Order."

27. He also needs more time to liaise with Mr Law's creditors to ascertain whether they are willing to provide him the funds necessary for further investigation of the Agreement to see whether it is impeachable. At present, the Official Receiver is strapped for funds, and the proposed investigation of the Agreement will not be able to proceed much further without an infusion of funds from the creditors.

28. Power for the court to grant the stay sought by the Official Receiver is said, on his behalf, to reside in sections 14 and 97 of the Bankruptcy Ordinance, Cap.6. I now set out so much of those sections as is relevant:

14. Power to stay pending proceedings

(1) The court may at any time after the presentation of a bankruptcy petition either stay any action, execution or other legal process against the property or person of the debtor or allow it to continue on such terms as it may think just.

97. General power of court

(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.

29. I do not doubt that a bankrupt can be appointed a personal representative for the purposes of O.15, r. 6A, (see Wills, Administration and Taxation by Barlow etc (4th Ed) p.175), but it is generally undesirable: see Bell v. Timiswood [1812] 2 Phill Ecc 22; In re Barkers Trusts [1875]1Ch 43 and In re Bowron [1914] 84 LJP 92. In the present case, it is particularly undesirable to have Mr Law continuing as personal representative in Mr Yuen's action because of Mr Law's course of conduct so far in acceding to all the demands of his relative, Mr Yuen, against the Deceased's estate. To avoid an appearance of impropriety, it would be better to have Mr Law replaced by someone standing in an arms-length relationship to Mr Yuen. A circumstance inclining me to exercise my discretion in the direction of staying Mr Yuen's action is that it would afford the Official Receiver an opportunity to have Mr Law replaced by someone seen to be independent.

30. For Mr Yuen, it was argued that, under s.14, the court lacked jurisdiction to grant a stay of Mr Yuen's action, since that action was not against "the property" of Mr Law. Reliance was placed on a line of cases culminating in the Privy Council's decision in Commissioner of Stamp Duties (Queensland) v. Livingstone [1965] AC 694 that, as a general rule, a beneficiary under a will or intestacy has no legal or equitable property interest in the unadministered assets of a Deceased's estate. As the Deceased's estate is unadministered, Mr Law cannot be said to have any "property" by virtue of being next-of-kin, so it was argued on Mr Yuen's behalf.

31. A beneficiary under a will or intestacy does, however, have a chose in action to have a Deceased's estate properly administered : (Commissioner of Stamp Duties (Queensland) v. Livingstone. p.717 and Re Leigh's Will Trusts [1970] Chancery 277), and can, in appropriate circumstances, even follow and recover assets which have been improperly abstracted from an estate: Commissioner of Stamp Duties (Queensland) etc, page 714.

32. "Property" is defined in s.2 of the Bankruptcy Ordinance ("the Ordinance") to include chases in action:

"'property' includes money, goods, things in action, land and every description of property, whether real or personal and whether situate in Hong Kong or elsewhere, also obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as above defined;"

33. The property of a bankrupt divisible amongst his creditors is made by s.43 of the Ordinance, to comprise:

"(i) all such property as may belong to or be vested in the bankrupt at the commencement of the bankruptcy or may be acquired by or devolve on him before his discharge;

(ii) the capacity to exercise and to take proceedings for exercising all such powers in or over or in respect of property as might have been exercised by the bankrupt for his own benefit at the commencement of his bankruptcy or before his discharge."

Section 53(4) of the Ordinance also provides:

"(4) where any part of the property of the bankrupt consists of things in action, such things shall be deemed to have been duly assigned to the trustee."

34. On the basis of a chose in action, a future interest, or property which may devolve on him, Mr Law, as next-of-kin, has "property" in the estate of the Deceased sufficient to bring him within the scope of s.14(1) of the Ordinance, in my judgment, for the purpose of staying Mr Yuen's action.

35. According to the submissions made on Mr Yuen's behalf, the Court, taking into account s.97(1) of the Ordinance, should decline jurisdiction to intervene in Mr Yuen's action, since Mr Yuen is a stranger to the bankruptcy. For Mr Yuen, reliance was placed on the well-known observation made by Lord Selborne L.C. in Ellis v. Silber (1872) 8 Ch. App 83, 86:

"That which is to be done in bankruptcy is the administration in bankruptcy. The debtor and the creditors, as the parties to the administration in bankruptcy, are subject to that jurisdiction. The trustees or assignees, as the persons intrusted with that administration, are subject to that jurisdiction. The assets which come to their hands and the mode of administering them are subject to that jurisdiction; and there may be, and I believe are, some special classes of transactions which, under special clauses of the Acts of Parliament, may be specially dealt with as regards third parties. But the general proposition, that whenever the assignees or trustees in bankruptcy or the trustees under such deeds as these have a demand at law or in equity as against a stranger to the bankruptcy, then that demand is to be prosecuted in the Court of Bankruptcy, appears to me to be a proposition entirely without the warrant of anything in the Acts of Parliament, and wholly unsupported by any trace or vestige whatever of authority."

36. In my view, however, the circumstances of the present case gave rise to a classic bankruptcy point, namely, the entitlement of the Official Receiver as trustee-in-bankruptcy to seek to impeach the Agreement as a sham or fraudulent transaction: Ex parte Butters (1880) 14 Ch D 265; Re Yates, ex parte Brown (1879) 11 Ch D 148; Re Hutton [1969] 2 Ch 201. Another route leading to the same result is to classify the claim the Official Receiver might wish to assert against Mr Yuen as one relying on a higher and better title: see Ex p Cohen (1871) LR 7 Ch. App 20.

37. In my judgment, sections 14 and 97 of the Ordinance, both singly and in combination, empower this court to grant a stay of Mr Yuen's action. Whether the court should exercise its discretion to grant a stay depends on the circumstances and what is just and convenient: See Re Hutton, page 207 F.

38. Justice and convenience, in my view, dictate that the Official Receiver, in the circumstances of the present case, should have the stay he seeks, so that he can further explore the bona fides of the Agreement, while at the same time attempting to garner funds from Mr Law's creditors to assist such exploration.

39. So long as the status quo of the Bank not putting the Tung Chau Street flat on the market is maintained, and so long as there is no material change in Mr Yuen's circumstances, the court is unable to discern any undue hardship to Mr Yuen by the staying of his action.

40. The upshot is I order that Mr Yuen's action be stayed, but grant him liberty to apply, on two days' notice.