RE LO MAN HONG

HCB 625/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 625 OF 2013

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D E C I S I O N

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Introduction

1.  By a petition presented on 23 January 2013, Ms Lam Yue Christie sought an order of the court to adjudicate Mr Lo Man Hong a bankrupt.  They are husband and wife, though there is a petition for divorce in the District Court between them (FCMC 10733/2012) with Mr Lo being the petitioner and Ms Lam the respondent.  The debt on which the bankruptcy petition is based is constituted by amounts due under an order for payment of maintenance pending suit made by Deputy District Judge S. Lo on 30 August 2012 in FCMC 10733/2012.  That order required Mr Lo to pay a monthly sum of HK$65,000 for the maintenance of Ms Lam and their three children.  The bankruptcy petition was amended on 12 April 2013 to correct the amounts outstanding.  As amended, the petition avers that Mr Lo is indebted to Ms Lam in the aggregate sum of HK$135,000, being the aggregate sum of an unpaid balance of $5,000 in respect of October 2012 and the two monthly sums for November and December 2012.

2.  The petition first came before me on 29 April 2013.  Both Ms Lam and Mr Lo were unrepresented, though Mr Lo had filed an affirmation that mentioned the case of Re Cheuk On Ching [2004] 3 HKC 192, to which I shall refer below.  Two legal issues seem to me to have arisen, namely, whether arrears of periodic payment for maintenance pending suit ordered by the court in matrimonial proceedings are a debt on the basis of which a bankruptcy petition may be presented and, if so, whether the court ought to make a bankruptcy order on a petition founded on such a debt.

3.  Because of the legal issues involved, I adjourned the petition to 3 June 2013 for the parties and the Official Receiver to make submissions.  At the adjourned hearing, only the Official Receiver, through Mr Wilson Lee, made submissions to me on the law for which I am grateful.  Ms Lam indicated that because of the perceived legal difficulties that stood in her way, she did not wish to proceed and asked for leave to withdraw the petition.  However, as she was unrepresented, it is right that I should satisfy myself that the petition is indeed doomed to fail on legal grounds before I should allow it to go by default.  Moreover, as the legal issues that have arisen are of general relevance and have not apparently been determined in Hong Kong before, and as requested by the Official Receiver, I reserved my decision which I now hand down in writing.

Whether arrears of periodic maintenance provable in bankruptcy

4.  It is necessary to deal first with a question related to the issue, namely, whether arrears of periodic maintenance payments are a provable debt in the defaulting spouse’s bankruptcy.

5.  The position in England under the (UK) Bankruptcy Act 1914 was stated in Williams and Muir Hunter on Bankruptcy (19^th ed) at pp 168-169 as follows:

“Future payments of alimony or maintenance ordered by a matrimonial court to be paid by a husband, being incapable of valuation, are not a provable debt, and the husband remains liable for them notwithstanding bankruptcy. Arrears of such alimony or maintenance accruing due either before or after receiving order are equally not provable, and in principle for the same reason, namely, that the matrimonial court has such an unfettered discretion whether to enforce such arrears or not that they are equally incapable of valuation.”

This passage is supported by the authorities cited including Linton v Linton (1885) 15 QBD 239 (which concerned arrears of alimony accruing due after the adjudication of bankruptcy), In re Hawkins, ex parte Hawkins [1894] 1 QB 25 (in respect of arrears of alimony accruing due after the receiving order), Kerr v Kerr [1897] 2 QB 439 (which concerned arrears of alimony accruing due before the receiving order), and James v James [1964] P 303.

6.  Apart from the incapability of valuation of such debts, the rationale of the rule was explained by Vaughan Williams J in In re Hawkins, ex parte Hawkins, supra, at p 27 as follows:

“… the order for payment of alimony can be enforced both before and after the discharge in bankruptcy; and this is consonant to justice, for a man’s obligation to support his wife cannot cease on his bankruptcy. I can well imagine a state of circumstances where, notwithstanding his bankruptcy, a man may be living in affluence. The principle of alimony is that a man is under an obligation to support his wife, which continues uninterrupted down to the time of his discharge, and is unaffected by his discharge.”

7.  The rationale of the rule has further been explained on the ground that alimony was payable out of personal earnings, so that “that which would go to the wife would take nothing from the creditors”: Kerr v Kerr [1897] 2 QB 439, 443; Linton v Linton (1885) 15 QBD 239, 245.  This appears to be a reference to the rule that such part of the personal earnings of a bankrupt as was necessary for the maintenance of the bankrupt and his family did not pass to the trustee: see Williams and Muir Hunter on Bankruptcy (19^th ed) at pp 290-291.  In this regard, it may be noted that in Re Lam Cham Ho [1999] 3 HKC 688, after the Bankruptcy Ordinance had been amended in 1998, Le Pichon J held that the income payments order sought by the trustee under s 43E(3)(b) of the Bankruptcy Ordinance should be assessed in such a way that the disposable monthly income of the bankrupt excluded the amounts that he had to pay for the maintenance of his divorced wife and their children pursuant to an order for ancillary relief.[1]

8.  In the United Kingdom, the rule that overdue maintenance payments are not provable has been put on a statutory footing, the Cork Committee having stated they did not consider it would be appropriate for them to make any recommendation as to the way in which maintenance orders should be dealt with in the event of insolvency (Cmnd 8558, para 1297).  Rule 12.3(2)(a) of the Insolvency Rules 1986 expressly provides that “any obligation (other than an obligation to pay a lump sum or to pay costs) arising under an order made in family proceedings[2] or any obligation arising under a maintenance assessment made under the Child Support Act 1991” are not provable in bankruptcy.[3]

9.  In Hong Kong, orders for periodic payment of maintenance pending suit are, among others, are also subject to the court’s powers of variation and discharge as provided for in section 11 of the Matrimonial Proceedings and Property Ordinance (Cap 192).  The fact that such payments are subject to the special supervision of the court is illustrated by the rule that arrears for more than a year are not enforceable without the leave of the court: section 12(1).  As Vaughan Williams LJ said in Kerr v Kerr, supra, at p 443:

“In fact, the practice of the Divorce Division so much treats the sums periodically payable under its order as a fund for maintenance and not as property, and so much keeps its hand on the obligation to make these periodical payments for maintenance, that it is a searching rule that the Court will not, in the absence of special circumstances, make an order enforcing more than one year’s arrears.”

10.  Moreover, such powers can be exercised retrospectively to affect payments already accrued: AEM v VFM [2008] 3 HKLRD 36.  In principle, therefore, arrears of maintenance payments fall to be treated on the same basis so far as provability in bankruptcy is concerned.

11.  In Re Cheuk On Ching [2004] 3 HKC 192, Deputy Judge Poon (as he then was) had to decide whether a debtor’s ex-wife, who was owed periodic maintenance payments ordered by the family court, had standing to oppose a petition for the debtor’s bankruptcy.  In that context, his lordship accepted that the debt due to the ex-wife would not be provable in the husband’s bankruptcy, because the matrimonial court had such an unfettered discretion whether or not to enforce such arrears that they are incapable of valuation, citing in support Williams on Bankruptcy (19^th ed) at pp 168-169 and Halsbury’s Laws of England (4^th ed), Vol 3, at para 373.

12.  Prior to the legislative amendments which took effect in 1998, Hong Kong’s bankruptcy law was very closely based on 1914 Act. It seems clear to me that the law here was as stated in Williams and Muir Hunter on Bankruptcy.  Some doubts however have been expressed in academic writings as to whether the amendments effected in 1998 by the Bankruptcy (Amendment) Ordinance 1996 altered the position: see Emily Ng, When Divorce and Bankruptcy Collide … (2005) 35 HKLJ 151, 169-171.

13.  There is no specific legislation in Hong Kong equivalent to Rule 12.3(2)(a) of the Insolvency Rules 1986.  The question of what debts are provable remains governed here by the general provisions of section 34 of the Bankruptcy Ordinance (Cap 6) (“the Ordinance”), which are as follows:

“(1) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, tort, promise or breach of trust shall not be provable in bankruptcy.

…

(3) Save as aforesaid, all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the date of the bankruptcy order, or to which he may become subject before his discharge by reason of any obligation incurred before the date of the bankruptcy order, including a liability to pay further damages as provided for in section 56A(2)(b) of the High Court Ordinance (Cap 4) (following an award of provisional damages), shall be deemed to be debts provable in bankruptcy.

…

(4) An estimate shall be made by the trustee of the value of any debt or liability provable as aforesaid which by reason of its being subject to any contingency or contingencies, or for any other reason, does not bear a certain value or, alternatively, the trustee may refer such debt or liability to the court for valuation in which case the court shall establish a value in accordance with subsection (7).

(5) Any person aggrieved by any estimate made by the trustee as aforesaid may appeal to the court.

(6) (Repealed 76 of 1996 s. 25)

(7)     Where the trustee has referred the question of valuation to it under subsection (4), the court may direct the value to be assessed before the court itself without the intervention of a jury and may give all necessary directions for this purpose.”

14.  Section 34(6), which was repealed in 1998, provided as follows:

“If in the opinion of the court the value of the debt or liability is incapable of being fairly estimated, the court may make an order to that effect, and thereupon the debt or liability shall, for the purposes of this Ordinance, be deemed to be a debt not provable in bankruptcy.”

15.  Although s 34(6) was repealed, and the equivalent English provision had been relied on in the reasoning of the cases such as Kerr v Kerr and James v James, I do not think the repeal of that subsection evidences any legislative intention to abrogate the rule that generally, to be provable in bankruptcy, a debt must be capable of valuation.  First, subsections (4) and (7) of section 34 show that the valuation of a debt remains important for the purpose of its proof and provability.  A debt which is incapable of valuation because it is subject to an unfettered power of variation may be estimated to be of nil value.  Secondly, there is nothing in the amending Ordinance (No. 76 of 1996) that repealed s 34(6) or in the preceding Law Reform Commission’s Report on Bankruptcy (1996) to show that there was any intention to change the law in this regard.  Thirdly, the rule that orders for periodic maintenance payments are not provable was specifically mentioned in the Report on Bankruptcy (para 15.19) but no suggestion was made to alter it.

16.  The question has also been raised whether the change made to s 32 of the Bankruptcy Ordinance in 1998 means that arrears of maintenance payments are now provable.  Prior to the amendment, s 32(2) provided: “An order of discharge shall release the bankrupt from all other debts provable in bankruptcy.”  After the amendment, s 32(2) provides that “where a bankrupt is discharged, the discharge releases him from all the bankruptcy debts”.  “Bankruptcy debts” is defined widely in s  in such a way as to include arrears of maintenance payments.  Although s 32(7) provides that “[d]ischarge does not release the bankrupt from such other bankruptcy debts, not being debts provable in his bankruptcy, as may be prescribed”, no rules have been made to provide for debts arising from orders in family proceedings with similar effect to s 281(5)(b) of the Insolvency Act 1986 of the United Kingdom.[4]  It has therefore been suggested that under the Bankruptcy Ordinance, debts in the nature of arrears of maintenance payments are released upon the discharge of bankruptcy, and that this makes it undesirable to hold such debts to be non-provable.  The logic appears to be that, if the spouse cannot benefit from the bankruptcy regime by proving her debt, it is unfair that her claim should be released as a result of the discharge of bankruptcy.

17.  I am not concerned in the present case with the question whether such a debt is released upon discharge of bankruptcy.  It is not clear why no rules have been made pursuant to s 32(7) and I express no view on the question of the effect of discharge on such debts.  I do not however think that the change made to s 32 is sufficient to abrogate the rule that arrears of maintenance payments are not provable.  As I have mentioned above, there is simply nothing in the amendment Ordinance or the materials preceding the amendment to show that such a substantial change to the law was ever intended. 

18.  Accordingly, I am of the view that the debt relied upon by the petitioner here, being arrears of periodic payment for maintenance pending suit, would not be a provable debt in Mr Lo’s bankruptcy. 

Whether arrears of periodic maintenance a petitionable debt

19.  What debts may found a petition for bankruptcy is governed by different rules.  Section 3 of the Bankruptcy Ordinance provides:

“(1) A petition for a bankruptcy order to be made against a debtor may be presented to the court – (a) by one of the debtor’s creditors or jointly by more than one of them; …”

20.  Section 6 of the Ordinance provides:

“(1) A creditor’s petition must be in respect of one or more debts owed by the debtor, and the petitioning creditor or each of the petitioning creditors must be a person to whom the debt or (as the case may be) at least one of the debts is owed.

(2) Subject to sections 6A to 6C, a creditor’s petition may be presented to the court in respect of a debt or debts if, but only if, at the time the petition is presented –

…

(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured;

… ”

21.  These provisions mean that a bankruptcy petition must be presented by a “creditor” and that it must be grounded by a debt foraliquidated sum payable at the time the petition is presented: Cheung Wah v China State Bank Ltd [1999] 4 HKC 185 at 188G, per Ribeiro J (as he then was).

22.  The word “creditor” is not defined in the Bankruptcy Ordinance, nor is the word “debts”.[5] It seems to me in this context a creditor is simply a person to whom a debt is due from the debtor.  There is no express provision that to found a petition, a debt must be provable in bankruptcy.  The basis for the statement in Butterworths Hong Kong Bankruptcy Handbook (4^th ed) at paragraph 6.05 that the debt in s 6(1) means “any liquidated sum that is provable in bankruptcy …” is not apparent to me.  In re McGreavy, ex parte McGreavy v Benfleet Urban District Council [1950] 1 Ch 269 is cited but the case does not seem to me to support the proposition.

23.  In McGreavy, a local authority presented a petition against the proprietor of a stadium on the basis of unpaid rates in respect of the stadium.  There was no dispute that such rates could not be recovered by action, but only by distraint.  The debtor argued that as such, unpaid rates could not found a petition under s 4 of the Bankruptcy Act 1914.  In the result the English Court of Appeal held that unpaid rates were a debt within s 4.  It is true that the court did take into account the fact that under s 33(1) of the Bankruptcy Act 1914 such rates were provable, and indeed had priority over other debts.  But I do not read the judgment as deciding that for a debt to be a petitionable debt, it must be provable.  In my view, as Mr Lee submits, McGreavy does not support the proposition in the Bankruptcy Handbook quoted above.

24.  The relationship between debts which are provable and debts which can found a petition under the Bankruptcy Acts and the Insolvency Act 1986 was discussed recently by the English Court of Appeal in McGuinness v Norwich and Peterborough Building Society [2012] 2 All ER (Comm) 265. There, a guarantor had provided a guarantee and indemnity to the creditor in respect of the debtor’s obligation.  The borrower defaulted and the creditor proceeded to enforce the guarantee by serving a statutory demand on the guarantor and then petitioning for his bankruptcy.  The guarantor argued that his liability under the guarantee was not a debt for a liquidated sum as it was required to be in order to found a creditor’s petition under s 267(2)(b) of the Insolvency Act 1986. 

25.  In his judgment (at paragraphs 21, 22, 23, 28 and 29), Patten LJ explained that the concept of a debt in a liquidated sum first appears in s 6 of the Bankruptcy Act 1869, to which one can trace the distinction made in all subsequent bankruptcy statutes between provable and petitionable debts.  He also pointed out that a “liquidated sum” has never been defined in any of the legislation and “appears to be the codification in the 1869 Act of earlier decisions of the courts as to what constituted a good petitioning creditor’s debt”.  He cautioned that “[c]ases after 1869 (and to a lesser extent, after 1825) as to whether a debt is provable are not therefore entirely reliable guides as to what continued to be a good petitioning creditor’s debt” (paragraph 29).

26.  In my opinion, in the context of the Bankruptcy Ordinance of Hong Kong, Ms Lam, as a wife who was owed arrears of maintenance payments, is a “creditor” of Mr Lo, to whom a “debt” is due.  The liability of Mr Lo is pre-ascertained and specified in the order for maintenance.  The amount that he is obliged to pay is not subject to any further process of assessment or calculation, though his obligation may be altered by the court upon application made under the Matrimonial Proceedings and Property Ordinance. Accordingly it seems to me that the debt due to Ms Lam is “for a liquidated sum” payable at the time her petition was presented, even though for the purpose of proving in bankruptcy it may be of too uncertain a value by reason of its susceptibility to variation and discharge at the discretion of the family court. It follows that the debt owed to Ms Lam is in my view capable as a matter of law of being used as the basis of a bankruptcy petition against Mr Lo.

Exercise of power in petitions founded on arrears of periodic maintenance payments

27.  The question of when it would be appropriate to make a bankruptcy order on a petition founded on a non-provable debt has been discussed in two English cases.  Russell v Russell [1999] 2 FCR 137 concerns a bankruptcy petition presented by a wife against her husband on the basis of a lump sum order in ancillary relief proceedings.  Such a lump sum order was at that time not a provable debt in bankruptcy by virtue of the then provision of rule 12.3(2) of the Insolvency Rules 1986.  Chadwick J proceeded on the basis that in the absence of special circumstances, it would not usually be appropriate as a matter of discretion to make a bankruptcy order on a petition presented by a wife in respect of an unprovable debt.  However, he held that there were special circumstances in that case.  He identified three such special circumstances, as follows:

“First, this is a husband who has been found by the court to have been less than frank in disclosing to the court particulars of his income and capital.

Secondly, this is a debtor who has failed to pay the costs ordered to be paid in [other proceedings].

Thirdly, this debtor has failed to pay the costs which have been taxed in the matrimonial proceedings …”

28.  In Levy v Legal Services Commission [2001] 1 All ER 895, a husband was ordered to pay his former wife’s costs in ancillary relief proceedings in which they had both been legally aided.  The Legal Services Commission served a statutory demand on the husband and subsequently presented a bankruptcy petition against him.  The English Court of Appeal held that the order for costs was a non-provable debt by virtue of rule 12.3(2) of the Insolvency Rules 1986.[6]  It went on to hold, however, that the Insolvency Act 1986 allows a creditor with a non-provable debt to present a bankruptcy petition based on that debt.  Nevertheless, the court set aside the statutory demand on the basis that there was no prospect of the court making a bankruptcy order on the petition. 

29.  On the circumstances in which it would be appropriate to exercise the jurisdiction to make a bankruptcy order on a petition founded on a non-provable debt, Jonathan Parker LJ, referring to Russell v Russell, stated as follows:

“41.   It is apparent from the nature of the special circumstances which he identified that Chadwick J regarded misconduct by the debtor as a relevant factor in determining whether a bankruptcy order should be made on a petition based on a non-provable debt.  For my part, I find it difficult to see why misconduct by the debtor should be relevant in this context.  However badly or irresponsibly the debtor may have behaved, the position still remains that the petitioning creditor has no financial interest in the bankruptcy process.  Nor in my judgment, does the debtor’s failure or refusal to pay other debts (whether provable or non-provable) constitute a “special circumstance” in this context.  If the debts are non-provable, then non-payment of them is a matter outside the bankruptcy regime; if they are provable, then the creditor concerned has his remedy.

42.     To my mind, the fact that the debtor may have so misconducted his affairs that it may be said that he (in effect) deserves to be made bankrupt cannot justify the making of a bankruptcy order on a petition based on a non-provable debt.

43.     It was suggested in argument … that a petitioning creditor with a non-provable debt may nevertheless have a legitimate interest in initiating a bankruptcy if there is a prospect of a surplus being available after all proving creditors have been paid in full.  In my judgment, however, it would be an abuse of the bankruptcy process to have recourse to it for that purpose.  The fundamental purpose of the bankruptcy regime is the distribution of the bankrupt’s estate rateably among proving creditors: that is its raison d’etre.  To seek to use the bankruptcy regime for the purpose of establishing a surplus after the proving creditors have been paid in full is, in my judgment, to seek to use it for a collateral purpose and is not permissible.

44.     In what circumstances, then, might the court be persuaded to exercise its jurisdiction to make a bankruptcy order on a petition based on a non-provable debt?  Since the jurisdiction exists, I have to accept that there may be wholly exceptional cases where the court will be persuaded, in its discretion, to do so.  I confess, however, that I find it extremely difficult to foresee the circumstances in which that may occur, since, for reasons already given, the jurisdiction itself seems to me to be wholly anomalous.  As at present advised, the only situation in which I can envisage that there might be a possibility of the court making a bankruptcy order on a petition based on a non-provable debt is where a supporting creditor with a provable debt obtains a change of carriage order pursuant to Rule 6.31. The effect of such an order is that, in contrast to the situation where a supporting creditor is substituted as petitioner and the petition is amended accordingly, the petition remains unamended but the creditor who has obtained the change of carriage order has the carriage of the petition in place of the petitioning creditor.  But I am far from saying that a change of carriage order would necessarily be made in such circumstances, or that, if it were to be made, the court hearing the petition would necessarily make a bankruptcy order.

45.     Subject to that possibility (if it be such) I find myself unable to envisage any circumstances in which the court could properly make a bankruptcy order on a petition based on a non-provable debt.”

30.  Similarly, Peter Gibson LJ stated (at para 58):

“The statutory scheme to my mind is plain: a bankruptcy order is designed to vest the debtor’s assets in the trustee to enable the trustee to pay the provable and proved debts of the debtor (s. 324 Insolvency Act 1986). A non-provable debt is entirely outside the statutory scheme. I own to finding it puzzling that the 1986 Act contemplates that a non-provable debt is a bankruptcy debt (as defined in s. 382; see in particular s. 281(5)(b)). But, that being so, it would appear that Chadwick J. was right in Russell v Russell to say that a creditor with a non-provable debt may present a bankruptcy petition based upon that debt. However, like Jonathan Parker L.J., I find it extraordinarily difficult to conceive of any circumstances in which the court would make a bankruptcy order on a petition founded on such a debt. …”

31.  I respectfully agree with their Lordships’ reasoning.  In the context of the Bankruptcy Ordinance of Hong Kong, I have likewise found it difficult to envisage circumstances in which it would be appropriate to make a bankruptcy order on a petition founded on an unprovable debt, since the petitioner, by definition, has no interest in the distributions in the bankruptcy and has no right as a proving creditor vis-à-vis the trustee in bankruptcy.  The trustee, whose function is to get in, realise and distribute the bankrupt’s estate “among the creditors in respect of the bankruptcy debts which they have respectively proved” (see s 67(1) of the Bankruptcy Ordinance), has no duties to perform in relation to such a petitioner.  This may be contrasted with Re Cheuk On Ching, which held that a debtor’s ex-wife who was a creditor in respect of periodic maintenance payments had sufficient interest to oppose a petition for the debtor’s bankruptcy.

32.  As to the “change of carriage order” referred to by Jonathan Parker LJ in Levy, s 102 of the Bankruptcy Ordinance is in quite different terms from Rule 6.31 of the (UK) Insolvency Rules 1986, and does not permit a change of carriage of a bankruptcy petition without requiring a substitution of the petitioner: see Re Wong Wai Dai [2001] 2 HKLRD 465, 470.  So even that limited circumstance in which it might be considered appropriate in the United Kingdom to make a bankruptcy order on a petition founded on an unprovable debt does not arise in Hong Kong.

33.  In any event, no other creditor of Mr Lo has appeared to support the petition.  It follows that notwithstanding that the provisions of the Bankruptcy Ordinance do not prevent Ms Lam from presenting a bankruptcy petition based on the arrears of maintenance payments in this case, the court acting in accordance with its settled practice will not make a bankruptcy order on her petition.

Conclusion and order

34.  For these reasons, I am satisfied that the petition, even if pursued, would have had no prospect of resulting in the making of a bankruptcy order against Mr Lo.  It is accordingly dismissed.

35.  The petitioner has to pay the Official Receiver’s costs, which are sought and which I assess in the sum of $11,425.