RE LAM FUNG

HCBI 927/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS

INTERIM ORDER APPLICATION HCBI NO. 927 OF 2002

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REASONS FOR DECISION

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1. The present applications are brought under sections 20 and 20A of the Bankruptcy Ordinance (Cap. 6) ("the Ordinance") for interim orders under the scheme of individual voluntary arrangement ("IVA"). The applicant debtor in HCBI 927/2002 ("the First application") is an insolvent individual who is not an undischarged bankrupt while the applicant debtor in HCBI 1142/2002 ("the Second application") is an undischarged bankrupt. Since the Second application involves an undischarged bankrupt, the Official Receiver also appeared at the hearing. At the hearing on 20 January 2003, the Official Receiver submitted that the term contained in the proposal regarding the unclaimed or undistributed money in relation to Rule 122C(2)(j) of the Bankruptcy Rules (Cap. 6) ("the Rules") had failed to comply with section 128(1) of the Ordinance. The solicitor for the debtor therefore asked for an adjournment to consider the submissions made by the Official Solicitor on this point. On the same day as the hearing, I also adjourned the First application to enable the solicitor for the debtor to make submissions on section 128(1) as its proposal also contained almost identical terms in respect of the provisions dealing with the requirements of Rule 122C(2)(j).

2. At the adjourned hearing on 28 January 2003, solicitors in both applications submitted amended proposals including amendments to the relevant clauses to comply with section 128(1). All the parties agreed that section 128(1) applied to Rule 122C(2)(j). After having heard submissions from the solicitors for both applicants and from the Official Receiver, I acceded to the amendments, to which I would come back later. As the issue on whether section 128(1) was applicable to Rule 122C(2)(j) was raised for the first time since the recent surge of voluntary arrangement applications, I decided to reserve and hand down my written reasons, which I now do.

Rule 122C(2)(j) of the Rule

3. According to Rules 122A and 122C, a debtor, be he an undischarged bankrupt or not, is required to submit a proposal containing matters set out in Rule 122C(1) and (2)(a) to (o). Rule 122C(2)(j) requires the debtor to state or otherwise deal with:-

"the manner in which funds held for the purpose of payment to creditors, and not so paid on the termination of the arrangement ..."

4. The relevant clause in the proposal before its amendment in the First application deals with Rule 122C(2)(j) in the following manner:

"Funds held on Terminations:

(1) On termination of the IVA, for whatever reason, the Nominee shall be entitled to retain from any funds under his control such as funds as he thinks fit for such period as he thinks fit, on account of his fees, costs, and expenses in addition to any other, sum contemplated to be retained by him pursuant to this proposal.

(2) If any of my contributions to the IVA remain unclaimed when the Nominee issues notice that the IVA had been fully implemented:

(a) the Nominee shall give 15 days' notice to the IVA Creditors whose share in my contributions remain unclaimed of this intention and at the expiry of that period he shall pay the amounts unclaimed to me and provide me with a list of the persons to whom they are payable;

(b) I shall remain liable to the IVA Creditors concerned for the amounts of such contributions; and

(c) the Nominee shall have no further duties, obligations or liabilities to those IVA Creditors."

5. As for the Second application, the relevant clause in the proposal is almost identical except that it does not contain clause (1) in paragraph 4 above. For the sake of comparison, I also set it out in full:

"Unclaimed or Undistributed Money

If any dividend remains unclaimed or unpaid when the Nominee issues notice that the IVA has been fully implemented:

a. they shall give 15 days' notice to the IVA Creditors (at their last known and acknowledged address) whose dividends remain unpaid of this intention and at the expiry of that period they shall pay the amounts unclaimed or unpaid to me and provide me with a list of the persons to whom they are payable;

b. I shall remain liable to the IVA Creditors concerned for the amount of such dividends; and

c. The Nominee shall have no further duties, obligations or liabilities to those IVA Creditors."

6. The provisions in Rule 122C(2)(j) are identical to Rule 5.3(2)(l) of the Insolvency Rules 1986 in England. As the provisions in both jurisdictions are silent as to how Rule 122C(2)(j) should be dealt with, practitioners have the tendency of adopting precedents from the UK. As a consequence the majority of the debtor's proposals deal with Rule 122C(2)(j) in similar fashion and it is important to note that these proposals all contain provisions allowing the debtors to keep these funds referred to in S122C(2)(j) upon termination of the IVA.

7. In Hong Kong, the laws on IVA which are based on the Insolvency Act 1986 and Insolvency Rules 1986 in England only became part of the bankruptcy law and formed part of the Ordinance in 1996 when the amendments to the Ordinance were passed into law in 1996. The amendments were essentially based on the recommendations contained in the "Report on Bankruptcy of the Law Reform Commission of Hong Kong" published in May 1996 ("the Report"). The amendments inter alia repealed the old provisions on compositions and schemes of arrangement and added inter alia the new sections 20 to 20 L to the Ordinance in respect of IVA.

8. In Hong Kong there are two forms of compromise a debtor can make with his creditors: compositions and schemes of arrangement (see section 2 of the Ordinance). According to Fletcher's "the Law of Insolvency" (2nd ed.) at p.42,

"In the case of a composition the debtor personally retains, or resumes, control of his assets and agrees to pay a certain sum to his creditors from the proceeds accruing to him. A scheme of arrangement on other hand involves the debtor's making over his assets to a trustee who thereafter administers them in accordance with the terms of the scheme."

9. In Hong Kong, however by virtue of Rule 122U of the Rules, regardless of the type of the IVA, the debtor is required to put the nominee into possession of the assets included in the arrangement. In the circumstances, a nominee will be entrusted with a statutory authority to administer all the assets and moneys included in the IVA.

Ambit of Section 128(1) of the Ordinance and the mechanism of section 128

10. The 1996 amendments also amended the old section 128(1) of the Ordinance which was originally modelled on the repealed section 153(1)¹ of the Bankruptcy Act 1914 in England by extending the applicability of section 128(1) to "a nominee under any voluntary arrangement" and section 128(1A) to an Official Receiver who is "the nominee under any voluntary arrangement".

11. Section 128(1A) is only applicable to a nominee who is the Official Receiver in an IVA. Since the nominees in both the applications are not the Official Receiver, section 128(1A) therefore has no relevance in the present applications.

12. Similar to the repealed section 153(1) of the Bankruptcy Act 1914, section 128(1) likewise also appears under the heading described as "unclaimed funds or dividends". Section 128(1) expressly catches 2 categories of persons under the Ordinance,

(a) a trustee (other than the Official Receiver) under any bankruptcy,

(b) a nominee under any voluntary arrangement.

13. By virtue of these provisions, section 128(1) expressly applies to any forms of IVA. After identifying the persons to be caught by this section, section 128(1) stipulates the statutory obligations of a trustee/nominee in respect of an "unclaimed dividend".

"...pursuant to this Ordinance has under his control any unclaimed dividend which has remained unclaimed for more than 6 months, or any money held in trust by the bankrupt for another person, or where, after making a final dividend, he has in his hands or under his control any unclaimed or undistributed money arising from the property of the bankrupt, he shall forthwith pay it to the Official Receiver who shall carry the same to an account to be termed the Bankruptcy Estate Account. The Official Receiver's receipt for the money so paid shall be a sufficient discharge to the trustee in respect thereof."

14. Section 128 (1) however in its present form is convoluted and cumbersome. When the existing section 128(1) is compared with the original section 128(1) before its amendment, it is clear that only the part relating to a nominee was superimposed onto the original section. As the original provision before the 1996 amendment only applied to bankruptcy, the insertion of the part regarding IVA into this section without making any consequential amendment does not only make difficult reading, but further creates difficulty of its applicability to the IVA. As a consequence, certain provisions clearly cannot be read into the context of IVA. The provision regarding "any money held in trust by the bankrupt for another person, or where after making a final dividend, he has in his hands or under his control any unclaimed or undistributed money arising from the property of the bankrupt" plainly cannot be intended to have any application to a nominee in IVA. In order to find out the provisions applicable to IVA, it is necessary to therefore identify the part, which can only be of application to the IVA. The relevant part applicable to IVA would appear like this: -

"Where a nominee under any voluntary arrangement, pursuant to this Ordinance has under his control any unclaimed dividend which has remained unclaimed for more than 6 months... he shall forthwith pay it to the Official Receiver who shall carry the same to an account to be termed the Bankruptcy Estate Account."

The words highlighted will be separately discussed below.

15. In order to find out if there is any relationship between section 128(1) and Rule 122C(2)(j), it is essential to examine the ambit of this section as the other sub-sections of section 128 apply both to a trustee and a nominee. According to the provision having been identified above, a nominee's obligation under section 128(1) arises when there is any "unclaimed dividend" which "has remained unclaimed for more than 6 months". While there is no statutory definition of the word "unclaimed dividend", there is also no definition of the Bankruptcy Estate Account ("the B.E. Account"). The Official Receiver unfortunately has not been able to assist me with more details of this statutory account save that that she confirmed to me that there has been maintained with the Official Receiver's Office an account so described for the purpose of receiving moneys under section 128 of the Ordinance. After having read the entire section 128 and for the purpose of the present applications, I think it suffices to note that the B.E. Account is a statutory account set up in pursuance to section 128 and is kept and maintained by the Official Receiver.

16. There is also no statutory definition as to what constitutes an "unclaimed dividend". However the meaning of "unclaimed dividend" was established obiter in Higginson & Dean ex parte the Attorney-General [1899] 1 QB 325 in which Wright J, held that an "unclaimed dividend" means a dividend that has been declared upon admitted and existing proofs, but which the persons entitled to it neglect to claim.

17. The meaning of "unclaimed dividend" when applied to section 128(1) seems to suggest that the obligation to pay such money to the Official Receiver is in connection with dividends for which the creditors have proved their debt but for some reason or the other have neglected to claim. The obligation therefore only arises when there are dividends unclaimed. It should not affect any moneys which are not in the nature of "unclaimed dividends", for example, those moneys under section 74 of the Ordinance regarding a bankrupt's entitlement to any surplus remaining after payment in full of his creditors, with interest, and of the costs, charges and expenses of the proceedings under the bankruptcy petition.

18. Section 128(1) goes on to provide that once the unclaimed dividends or undistributed assets of the bankrupt have been paid to the Official Receiver, his receipt shall be a sufficient discharge to the trustee. Thereafter, it becomes the responsibility of the creditors to make an application within 5 years of the date when the money was paid in accordance with section 128(3) of the Ordinance and Rule 198 for payment from the B.E. Account.

19. Under section 128(4) and (5), the Official Receiver in fact has a discretion to transfer to the general revenue of Hong Kong such money remained unclaimed in the B.E. Account for 5 years after giving the necessary notice to such parties as he may think fit.

20. Further, under section 128A, the Official Receiver is empowered to deposit such sum in the B.E. Account, which money is not required to answer demands in respect of debtor's estates, with a bank and transfer it to the general revenue.

21. The provisions requiring the Official Receiver to transfer an unclaimed dividend to the B.E. Account instead of allowing a trustee or a nominee to return it to the debtor, in my view are designed to safeguard the creditors' entitlement to the monies. By the operation of these provisions, the creditors' interest is protected by the following: First, under section 128(3), a decision of the Official Receiver is subject to appeal. Second, the right to transfer is discretionary and is subject to notice. Third, the discretion to deposit into a bank only concerns excess not required to meet the debtor's estate demand.

22. This mechanism of section 128 which applies also to IVA provides a machinery whereby on the one hand unclaimed dividends are collected and monitored by the Official Receiver for the protection of the unpaid creditors, while on the other hand, the Official Receiver is empowered to transfer any unclaimed dividends to the public revenue to avoid the monies, which have been unclaimed for a reasonable period of time, being left in a limbo.

Relationship between Section 128(1) and Rule 122C(2)(j)

23. Having examined the mechanism of section 128, I now come to deal with the issue that arises for determination in the present case -

(1) Does section 128(1) apply to Rule 122C(2)(j)?

(2) If, the answer is yes, whether the parties to IVA can contract out of this provision?

(1) Is section 128(1) applicable to Rule 122C(2)(j)?

24. In order to determine this issue, the first question which has to be decided is whether "unclaimed dividends" have the same meaning as the funds being referred to in Rule 122C(2)(j). While section 128(1)(b) is expressly applicable to both forms of IVA, its applicability to Rule 122C(2)(j) is not so apparent. While the operative term in Rule 122C(2)(j) refers to "funds held for the purpose of payment to creditors and not so paid on termination", that of section 128(1) however refers to "unclaimed dividends".

25. The word "dividend" is not found in any of the IVA provisions. Instead the word "funds" appears apart in Rule 122C(2)(j) also in Rule 122C(2)(i) which provides:-

"the manner in which funds held for the purpose of the arrangement are to be ranked, invested or otherwise dealt with pending distributions to creditors ......"

26. The wording used in sub-rules (i) and (j) shows that funds are defined according to the purpose they are held for by the nominee. Funds referred to in sub-rule (i) are moneys held by the nominee for the purpose of implementing the IVA. In my judgment, the meaning of funds used in the context of sub-rule (i) is much wider and should include fees, costs, charges and expenses set out in Rule 122ZB as well as money "held for the purpose of payment to creditors". Under Sub-rule (j), however, funds clearly only refer to payments the nominee is obliged to make to the IVA creditors but unable so to make.

27. In order to determine if "unclaimed dividends" is intended by the legislature to cover the funds referred to in Rule 122C(2)(j), it is necessary to understand under what circumstances the funds held by the nominee for the payment of the creditors will become unpaid. While the IVA is being administered by the nominee, similar to a trustee in bankruptcy who is required to distribute dividends to the creditors, a nominee is bound by the terms of the IVA to effect payments to the IVA creditors whose submitted claims have been admitted by the nominee. It is only when the IVA creditors fail to collect the payments or the payments cannot be delivered to them that funds become unpaid.

28. In those circumstances, there is, in substance, little distinction between "unclaimed dividends" in bankruptcy and creditors' unpaid funds in IVA. Had section 128(1) been amended to incorporate the corresponding amendments relevant to IVA, the terminology would be more consistent. In the circumstances, I am in agreement with the Official Receiver that "unclaimed dividends" apply to those funds under Rule 122C(2)(j).

29. Having disposed of the problem on unclaimed dividends, the analysis of these provisions is further complicated by the incongruity, which exists between them on the operative provisions of "unclaimed dividend, which has remained unclaimed for more than 6 months". A nominee according to section 128(1) is required to pay to the Official Receiver unclaimed dividend he has had in his hands for more than 6 months. This does not seem to make any sense in the context of IVA as according to the plain reading of this section a nominee is obliged to pay unclaimed dividends to the Official Receiver whenever he has these monies, which have been unclaimed for more than 6 months even when the IVA is still being implemented. However, before the IVA is terminated, a nominee, as mentioned above under Rule 122U, is statutorily bound to administer a debtor's assets and money included in the IVA. A nominee will be therefore required to hold any unclaimed funds, which for various reasons cannot be effected for the IVA creditors pending distribution. The literal meaning of the express language in my view leads to illogical consequence in the context of IVA.

30. In order to find out the legislative intent of this specific requirement in the context of IVA, I have further considered the Report and the Legislative Council debates on the amendments to the IVA provisions contained in Hansard. They however throw very little light on the triggering provision of " 6 months", which provision originally emanated from the repealed section 153(1) of the 1914 Act in England as mentioned above. In England however, the "6 months" provision has since been scrapped and the relevant provisions on unclaimed dividends is now governed by Reg.31 of the Insolvency Regulations 1994 ("the Regulations"), which provides as follows:

" Notwithstanding anything in these Regulations, any money-

(a) in the hands of the trustee at the date of his vacation of office, or

(b) which comes into the hand of any former trustee at any time after his vacation of office,

representing, in either case, unclaimed or undistributed assets of the bankruptcy or dividends, shall forthwith be paid by him into the Insolvency Services Account."

31. Section 153(1) of the 1914 Act, the Regulations and the original section 128(1) before the 1996 amendments only applied to a trustee in bankruptcy. Despite the change of the laws in England in repealing the "6 months" provision, Hong Kong on the contrary continues retaining the provision of "6 months" and even further extending them to IVA when section 128(1) was amended in 1996. In order to understand the rational behind the requirement of "6 months" in section 128(1), it is useful to examine the provisions in the Ordinance and the Rules which contain provisions referring to "6 months" requirement either in respect of a trustee in bankruptcy or a nominee in IVA. The only provisions, which make reference to "6 months" are found in Rules 190 and 191, which only apply to bankruptcy.

32. Under Rule 190, the creditors' committee is required to audit and certify the cash book at least once every 6 months. Further Rule 191 also contains the following provisions, which make reference to 6 months:

"every trustee shall, at the expiration of 6 months from the date of the bankruptcy order and at the expiration of every succeeding 6 months thereafter until his release, transmit to the Official Receiver, a copy of the cash book...(Rule 191(1))

When the estate has been fully realized and distributed or if the bankruptcy order is annulled, the trustee shall forthwith send in his accounts to the Official Receiver although the 6 months may not have expired."(Rule 191(2))

33. Although Rule 190 does not seem to shed much light in understanding section 128(1), Rule 191 is of particular significance. According to Rule 191(1) and (2), the trustee is required to send to the Official Receiver accounts every 6 months from the date of the bankruptcy order to the date of his release. However, when the trustee's asset have been fully realised and distributed or if the bankruptcy order is annulled, the obligation arises immediately upon the happening of any of these events. These rules when considered in the context of section 128(1) seems to provide a logical explanation for the obligation of the trustee to pay unclaimed dividends which have been unclaimed for 6 months to the Official Receiver. The period during which a trustee is obliged to submit accounts under 191(1) corresponds with the period for which dividends fail to be claimed. While Rule 191(1) seems to offer some explanation for the "6 month" provision in 128(1), such explanation is only relevant to a trustee and it still does not shed any light on the rationale of subjecting a nominee to effect payment to the Official Receiver in relation to funds, which have been unclaimed for 6 months.

34. While Rule 122Z requires a nominee under certain circumstances (that is, when a nominee is required to: (a) carry on the debtor's business or to trade on his behalf or in his name; (b) realise assets of an undischarged bankrupt belonging to the estate or (c) administer or dispose of any funds of the debtor or the estate)) to send at least once every 12 months to the court, the debtor and the IVA creditors an abstract of all the receipts and payments in connection with the IVA, there is no reference anywhere in either the Rules or the Ordinance requiring the nominee to submit the IVA accounts of intervals of 6 months.

35. While the statutory scheme regarding IVA is essentially different to that of the bankruptcy, section 128(1) is so drafted to give an impression that it is equally applicable to both a trustee in bankruptcy and a nominee in IVA when in fact the true legislative intent seems to suggest the contrary. When section 128(1) is read in conjunction with Rule 122C(2)(j), it is patent that a nominee should only be subject to the statutory obligation of paying the unclaimed dividends to the Official Receiver upon the termination of the IVA.

36. Although Section 128(1) imposes an obligation on a nominee concerning funds unclaimed for 6 months, the provisions are silent as to whether a nominee is subject to the same obligation regarding dividends which have not been unclaimed for 6 months when the IVA is completed. In the circumstances can it be argued that when the IVA is terminated a nominee is at liberty to return the unclaimed dividends to the debtor instead of paying them to the Official Receiver? I think not. If that is the case, it would render the protection section 128(1) intends to provide to the creditors nugatory.

37. The spirit of Rule 122C(2)(j) is to require the debtor to make proper provisions regarding any unclaimed dividends held by the nominee upon termination of the IVA. However, by virtue of section 128(1), for funds, which have been unclaimed for 6 months, the nominee is obliged to pay them to the Official Receiver.

38. Reg.31 of the Regulations requires a trustee to pay the unclaimed funds to a statutory account immediately upon his "vacation of office" and Rule 191(2) similarly obliges a trustee to submit accounts forthwith when the estate has been fully realised or when a bankruptcy order is annulled. These provisions seem to suggest that when a statutory scheme comes to an end whether by annulment of a bankruptcy order or by a trustee vacating his office, the obligation arises notwithstanding that 6 months may not have expired. The same reasoning in my view ought to be applied to IVA. Further, section 128(1) also requires a trustee to pay such unclaimed funds to the Official Receiver upon making a final dividend. The existing provisions in section 128(1), however, are silent on the nominee's obligation upon termination of the IVA. In the circumstances, after having considered all the said provisions relevant to a trustee in bankruptcy, I form the view that in the absence of express provisions governing those funds which have not been unclaimed for 6 months when the IVA comes to end, there are two alternatives available to the nominee as how such funds be dealt with, both of which do not conflict with section 128(1): -

39. First, he can continue to keep the funds until the expiry of 6 months and if these moneys are still unclaimed, he is obliged to act in accordance with section 128(1). This however means that the nominees' duty cannot be immediately discharged upon termination. Further by the provision of Rule 122ZC, which requires a nominee to submit accounts to the court (as well as to the Official Receiver) upon completion of IVA, the court will therefore have the notice of any such unclaimed dividend and by Rule 199, the court has conferred upon it the power to order a nominee to pay such funds to the Official Receiver. These provisions plainly are intended to safeguard against any irregularities that may be found in IVA.

40. Second, the nominee in my view is not precluded by section 128(1) to pay the money to the Official Receiver only when the 6 months' period has lapsed. If he wishes to be discharged as soon as the IVA is terminated, he may pay all the unclaimed dividends to the Official Receiver when the IVA is completed.

41. According to section 128(1), the payment to the Official Receiver will only discharge a trustee but it does not expressly provide for the same discharge for the nominee. It is unfortunate that a similar discharge for the nominee has not found its way to the statute book. In order to obtain a discharge, nominees may in the circumstances need to include a clause for discharge in the IVA proposal.

42. For the reasons aforesaid, despite the anomalies found in the provisions, I am inclined to accept the Official Receiver's submission that Rule 122C(2)(j) is caught by section 128(1) and therefore provisions should be made in the terms of the IVA proposal to comply with section 128(1).

(2) Does section 128(1) disallow contracting out?

43. The word "shall" is found in section 128(1), which provides a strong inference that the section is meant to be mandatory. This statutory obligation imposed by section 128(1) precludes a debtor from contracting out of his obligations or a nominee from exercising any discretion regarding "unclaimed dividends". The clear legislative intent as mentioned above is to provide a level of protection to the creditors in the IVA. The IVA as approved by the creditor's meeting takes effect as if made by the debtor at the meeting and binds every person who in accordance with Rules 122M and 122Q (i) was entitled to vote at the creditors' meeting, whether or not he was present or represented at it. In the circumstances, an approved arrangement constitutes a consensual agreement between the debtor and all the creditors who attended and were entitled to vote at the meeting.

44. The rationale behind making the obligation mandatory under section 128(1) in my view is probably due to fact that the debtor's liability towards his creditors upon the completion of IVA is discharged. Unless an IVA is terminated by default, and the court is satisfied that the debtor has failed to comply with his obligations under the IVA, or that the documents supplied by the debtors are false or misleading (see section 20L), an unpaid IVA creditor cannot present a bankruptcy petition against the debtor. If the debtor is allowed to retain any unclaimed dividends upon completion, injustice may be suffered by the unpaid but unsecured IVA creditors who are left with only the remedy of bringing a claim against the debtor for the unclaimed funds when the debtor may by that stage have frittered away all his valuable assets.

45. Further, as mentioned above, by virtue of Rule 122U the nominee is to administer the assets according to the terms of the IVA. If the nominee's obligations on the disposal of the unclaimed dividends are contracted out of, in the event of default by the nominee, the aggrieved creditors are faced with the hurdle of fixing liability against the nominee, which can be insurmountable, be it tortious or contractual. The authorities in England seem to suggest that the chance of finding a nominee negligent is not particularly high (see Heritage Joinery (A Firm) v. Krasner [1999] BPIR 683). Furthermore, it is not uncommon that a nominee very often limits the scope of his contractual duty by the terms of the proposal. Therefore, despite the contractual nature of the IVA, a provision that provides fundamental protection to the IVA creditors should not be circumvented by private agreement.

46. In the circumstances, notwithstanding the existence of a binding agreement between the creditors and a debtor, the parties in my view are not at liberty to contract out of the provisions of section 128(1). The "private agreement" argument runs counter to the spirit of the legislature of requiring supervision of the IVA by the court and the Official Receiver. As a matter of fact, running throughout the entire relevant provisions of the Ordinance and the Rules regarding IVA is the retention of control by the court and the Official Receiver. Apart from a number of provisions empowering the court to monitor and give directions before the approval of the IVA (section 20J) and supervise the implementation after its approval (see section 20K and Rules 122Z and 122ZC, for example), the court is further given an unrestricted power to monitor unclaimed dividends under section 128(1). Rule 199 as mentioned above expressly empowers the court at any stage to order payment of any unclaimed or undistributed money arising from the debtor in the hands of a nominee to the Official Receiver in accordance with the terms of section 128(1).

47. The private agreement argument in my judgment also cannot be reconciled with the legislative spirit of conferring on the Official Receiver wide power and control concerning primarily the administration and financial control of the IVA. The IVA cannot truly be said to be a matter of private arrangement. Under Rule 122W, the Official Receiver is statutorily required to maintain a register of IVA, which register is open to public inspection. This requirement of maintaining a public register speaks volumes against making arrangements by private agreement with a view to circumvent the statutory provisions. The legislative intent of submitting the IVA, including scrutiny by the court, to surveillance by the Official Receiver is evident by the law draftsman adopting the alternative of empowering the Official Receiver to carry out the administration of IVA as recommended by the Law Reform Commission (page 59 of the Report) whilst not adopting the other suggested alternative of establishing a panel of IVA qualified practitioners, which latter suggestion therefore has not found its way to either the Ordinance or the Rules. As a result, the Official Receiver is conferred with extensive statutory duties and power for the purpose of effecting the supervision of the IVA : -

(1) Under Rule 122G, once an interim order is made, the debtor is required to serve a copy of the order on the Official Receiver if he is not a nominee;

(2) Under Rule 122X, a nominee if he acts as a chairman of the creditors' meeting is required to send to the Official Receiver a chairman report of the creditors' meeting if the arrangement is approved.

(3) Under Rule 122Y, a person who obtains a court's order of revocation or suspension of an IVA is required to send a sealed copy of the order to the Official Receiver. For a debtor who is an undischarged bankrupt, the Official Receiver is further required to give notice to the court whether it is intended to make a revised proposal to creditors or to invite reconsideration of the original proposal (Rule 122Y(4)(b)).

(4) Under Rule 122ZC, a nominee is required to send to the Official Receiver a notice of the final implementation of the IVA together with a summary of all receipts and payments made by him in pursuance of the IVA and explanations for any variance with the actual implementation of the originally approved proposal.

(5) Under Rule 122ZA, the Official Receiver is empowered to require the nominee to produce for inspection, accounts and records in respect of the IVA at any time during the course of the voluntary arrangement or after its completion and to order the same to be audited.

48. These statutory provisions as outlined above reflect the legislative intent of empowering the court to regulate the IVA after its approval by for example revoking and suspending the IVA, and the Official Receiver the role of administrating IVA.

49. As the legislative intent of section 128(1) is without doubt to provide a level of protection to the creditors, any provision in the IVA proposal which has the effect of contracting out the applicability of section 128(1) is likely void following the principles established in Mackay, ex parte, ex parte Brown, re Jeavons (1873) 8 Ch App 643 which were applied and confirmed in the House of Lords decision of British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2ALL ER 390. The principle elucidated from these authorities is: it is open to the court to refuse to give effect to provisions which run counter to the statutory legislation and it is immaterial that the parties do so for good business reasons and not with a view to circumventing the statutory provisions (see British Eagle (ibid at 391g-h).

50. For these reasons, I am of the view that any term, which has the effect of circumventing the provisions in section 128(1), may be struck down by the court.

Amendments

51. At the hearing, I acceded to the following amendments consented to by the nominee in respect of the two applications. I set out below and underline the relevant amendments. In the proposal of the First application, the amended clause is as follows: -

"If any of my contributions to the IVA remain unclaimed when the nominee issues notice that the IVA has been fully terminates:

(a) the nominee shall, subject to his overriding obligations under the Bankruptcy Ordinance may give 15 days' notice ......

(b) ......

(c) ......"

52. The relevant amended proposal for the Second application is: -

"If any dividend remains unclaimed or unpaid when the Nominee issues notice that the IVA has been fully completed:

(a) they shall give 15 days' notice to the IVA creditors (at their last known and acknowledged address) whose dividends remain unpaid of this intention and if the dividends remain unclaimed for more than 6 months, they shall pay the amounts unclaimed or unpaid to the Official Receiver accordingly to section 128 of the Ordinance and provide me with a list of the persons to whom they are payable;

(b) I shall no longer be liable to the IVA creditor concerned for the amount of such dividends; and

(c) ......"

53. Notwithstanding the apparent variance in the amendments in respect of the two proposals, I however acceded to them, as I was not inclined to rewrite the contents of the proposals and dictate how they should be prepared. Drafting a proposal requires skill and thought. It is incumbent on the solicitor or practitioner for the debtor to satisfy the court that the terms of the proposals are prepared in accordance with the law. The practitioner should be aware of the importance of careful drafting instead of copying straight from some precedents and standard conditions. I cannot emphasise more than borrowing a passage from the learned author, Stephen Lawson, in his book:

"... the person responsible for preparing a proposal should give due consideration not only to the necessity of incorporating standard conditions, but also should consider any standard conditions which are not to apply and any necessary variations. A simple proposal does not need to be encumbered with rigid time-consuming and potentially expensive procedures. Creditors' interests need to be borne in mind, as they will certainly not want to read lengthy legalistic conditions. On the other hand, the proposal must make it clear that standard conditions are incorporated..."

(Stephen Lawson "Individual Voluntary Arrangements" (2001) update 5, para. A7(2))

54. What Lawson said about standard conditions is as applicable to the terms of the proposal. Unfortunately with the proposals we very often come across, the practitioners seem to fail to direct their minds to the importance of careful drafting. Very often, courts in order to minimize costs and time have taken a pragmatic approach by raising requisitions only when the contents of the proposal are totally out of line. Practitioners however are wrong to assume that since the terms of the proposal are at the end of the day a matter to be approved by the creditors in the creditors' meeting the court should simply take a back-seat. The practitioners ought to be reminded of the court's scrutinizing role, and they should endeavour to ensure that proposals do not only comply with the statutory requirements, but also that they are prepared in such as way as are appropriate to the individual circumstances and facts of each application.

Conclusion

55. The analysis shows that while section 128(1) expressly applies to a nominee in IVA, the statutory obligations under which a nominee is subject to appear rather uncertain. However after having considered the provisions in their proper context, I agree with the parties that Rule 122C(2)(j) should be governed by section 128(1). Presently, most of the IVA creditors are banks and financial institutions, which in my view will hardly neglect or fail to collect their payments thereby giving rise to the circumstances calling for the application of section 128(1). Having said that however a debtor, when dealing with Rule 122C(2)(j) is required to ensure that the proposal contains provisions dealing with unclaimed dividends upon the termination of the IVA which must be in accordance with section 128(1). Therefore, for dividends, which have been unclaimed for 6 months, the nominee is subject to the obligations in section 128(1). In the event however that there are dividends which have not been unclaimed for more than 6 months, the nominee may still, subject to the consent of the parties, pay them to the Official Receiver or retain them until the expiry of 6 months.

56. As for funds which are not held for the purpose of payment to the creditors or any other matters such as the giving of notice to creditors before effecting payment to the Official Receiver by the nominee, they do not fall within the ambit of Rule 122C(2)(j). If however the debtor wishes to deal with those matters not covered by Rule 122C(2)(j), he is at liberty to deal with them in such reasonable manner as is acceptable to the creditors.

57. Lastly, I must also express my gratitude to the solicitors and the Official Receiver in the present case for their assistance especially Mr. Wong for the First application, who has zealously assisted me by submitting further materials on this issue after the hearing on 28th January 2003.