RE CHAN TIN LEUNG

HCB 3875/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 3875 OF 2012

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HCB 4147/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 4147 OF 2012

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(Consolidated by Order of the Honourable Mr Justice To dated
13^th August 2012)

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J U D G M E N T

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Introduction

1.  These two debtor’s bankruptcy petitions have been consolidated and have been ordered to be heard together, because they each raise the same question as to whether the debtor is entitled to present a bankruptcy petition whilst the debtor is subject to an extant individual voluntary arrangement (“IVA”).  

2.  This question gives rise to the consideration as to what is the proper statutory interpretation of (“BO”), which is headed ‘Who may section 3 of the Bankruptcy Ordinance Cap 6present a bankruptcy petition’.  Section 3(1) provides:

“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;

(b) by the debtor himself;

(c) by the nominee of, or any person (other than the debtor) who is for the time being bound by, a voluntary arrangement proposed by the debtor and approved by his creditors; or

(d) where a criminal bankruptcy order has been made against the debtor, by the Official Petitioner.”

3.  The uncertainty as to the answer to this question arises from the conflicting decisions of Master Andy Ho in Re Chung Wai Ling Simie [2004] 2 HKC 211 and Registrar Lung in Re Yue Man Pak [2011] 4 HKLRD 431.  Master Ho considered that a debtor subject to an IVA was excluded from petitioning for his own bankruptcy, whereas Registrar Lung reached the opposite conclusion.

4.  The Official Receiver has, therefore, asked for this matter to be ventilated before a Judge in the Bankruptcy jurisdiction.

5.  (References in this Judgment to numbered sections are to the numbered sections of the BO unless the context otherwise makes clear.)

The Facts

6.  The material facts can be canvassed shortly as follows.

7.  The debtor in HCB 3875/2012 proposed an IVA which was approved by creditors at the creditors' meeting on 4 January 2010. One of the conditions of the IVA was that the debtor should contribute $4,850 per month for 96 months. Despite repeated demands and requests, the debtor failed to make the 28th contribution which was due on 20 April 2012.  A Notice of Non-Compliance was given by the nominee on 3 May 2012, but by virtue of the failure to comply with the terms of the IVA, it was terminated on 21 June 2012.

8.  However, on 13 June 2012 – namely before termination of the IVA – the debtor presented a debtor's bankruptcy petition stating that he was unable to pay his debts.

9.  The debtor in HCB 4147/2012 proposed an IVA which was approved by creditors at the creditors' meeting on 4 June 2009.  One of the conditions of the IVA was that the debtor should contribute $8,000 per month for 80 months. Despite repeated demands and requests, the debtor failed to make the 35th contribution which was due on 2 May 2012.  A Notice of Non-Compliance was given by the nominee on 18 May 2012, but by virtue of the failure to comply with the terms of the IVA, it was terminated on 28 June 2012.

10.  However, on 27 June 2012 – namely before termination of the IVA – the debtor presented a debtor's bankruptcy petition stating that he was unable to pay his debts

11.  Hence, although in both instances the IVA has now been terminated, also in both instances the debtor's bankruptcy petition was presented whilst the IVA was extant.

12.  It is perhaps also not surprising that in each instance the petition was presented after default by the debtor of his obligations under the IVA.  While this would undoubtedly have permitted the nominee, or any creditor, to have presented a petition seeking a bankruptcy order to be made against the debtor, the question remains on those facts, and on the proper construction of the section, whether the debtor was himself entitled to present a petition.

The Official Receiver's position

13.  Mr Anthony Chan, Counsel for the Official Receiver, has made detailed submissions to assist the court in deciding the question in issue.  Mr Chan has fairly identified and explained the arguments on both sides of the question.

14.  He has done so in part because the Official Receiver has expressed the view that she is neutral as to the outcome of the two petitions, albeit that she is more inclined to the view that the correct position at law is that a debtor has the necessary locus to present his own bankruptcy petition, even when his IVA is still in force.

The conflicting authorities

15.  In the Re Chung Wai Ling Simie case, the debtor, Ms Chung, applied for an interim order under sections 20 and 20A on the basis that she would like to make a proposal to her creditors for an IVA.  The IVA was approved with modifications on 22 May 2003.  Shortly thereafter, on 26 August 2003, Ms Chung petitioned for her own bankruptcy while the IVA was still in place.  The IVA was terminated on 22 October 2003.

16.  In the Re Yue Man Pak case, the Registrar said the facts were almost identical to the facts in Ms Chung’s case, certainly so far as they were relevant to the legal issues for determination.

17.  In passing, and though it does not seem to me to matter for the proper determination of the legal question arising, it therefore would seem that in both cases before the Master and the Registrar the debtor had presented a petition within a fairly short time of the approval and coming into effect of the IVA.  This is rather different from the situation in the current two petitions, where there had apparently been compliance by the debtor with the obligations under the IVA for more than 2 and nearly 3 years respectively.

18.  Master Ho reached his decision notwithstanding that both counsel for the debtor in that case and counsel for the Official Receiver argued that the debtor had locus to have presented the petition, even though the relevant IVA was still in place. 

19.  Master Ho decided that Ms Chung did not have locus for 3 reasons.  First, he was of the view that the ordinary and natural meaning of section 3(1)(c) is that it excludes a debtor subject to an IVA to petition for his own bankruptcy. 

20.  Secondly, he concluded that an approved IVA is a statutory contract between the debtor and his creditors under which the debtor has to give up his fundamental right to petition for his own bankruptcy when he is unable to pay his own debt while the creditors are also denied their fundamental right to present a bankruptcy petition against the debtor unless the debtor defaulted as stipulated in section 20L. 

21.  Thirdly, he agreed with Professor Ian Fletcher’s comments on the construction of section 264(1)(c) of the Insolvency Act 1986 which is the English equivalent of section 3(1)(c).

22.  Professor Fletcher’s view – expressed in Fletcher, The Law of Insolvency (4th Ed., 2009), §§6-092 to 6-093 – is that the logic underlying precluding a debtor from petitioning for his own bankruptcy during the subsistence of an IVA is apparently that it should not be open to a debtor who has induced his creditors to accept his proposal for an IVA to render the entire exercise a futility by his own conduct in first defaulting upon his obligations under the IVA and thereafter presenting a petition for his own bankruptcy. 

23.  Professor Fletcher further suggests that the exclusion of such a debtor from petitioning for his own bankruptcy is an important safeguard because the debtor might otherwise occupy a position of considerable tactical strength which he might exploit in appropriate circumstances both to frustrate the objectives of the IVA and also to flout the obligations into which he had previously entered with his creditors’ approval.

24.  The Registrar later reached his contrary decision, notwithstanding that counsel for the Official Receiver sought to persuade the Registrar to follow the decision of the Master.  The Registrar decided as he did for the following reasons.  First, section 3(1)(b) does not provide that it is subject to section 3(1)(c).  Secondly, section 20L(1) does not prohibit the court from making a bankruptcy order on a petition presented by the debtor.

25.  So he thought the words in brackets in section 3(1)(c) (ie the words “other than the debtor”) are descriptive, rather than restrictive of the debtor’s right to present a petition under section 3(1)(b).

26.  Further, the Registrar was of the view that Master Ho ought not to have adopted the views of Professor Fletcher because Master Ho did not investigate whether any of the reasons identified by Professor Fletcher for excluding a debtor from petitioning for his own bankruptcy during the subsistence of his IVA exist in the case before the Master.  In any event, the Registrar took the view that Professor Fletcher’s opinion should not apply generally and should not represent the views of the Hong Kong Legislature.

27.  The Registrar also went to consider that even were a debtor not able to present a bankruptcy petition during the subsistence of his IVA, he would have exercised his discretion under section 124 not to invalidate the petition because the irregularity did not cause any substantial injustice or prejudice to any creditors or interested parties in the particular case.

28.  Leaving aside this last point, the contest between the conflicting decisions of the Master and the Registrar focuses on the words in parenthesis in section 3(1)(c); that is, do the words “(other than the debtor)” restrict the ability of the debtor to present a bankruptcy petition when there is an extent IVA, or are those words merely part of a description of one class of persons entitled to present a bankruptcy petition?

Other relevant statutory provisions

29.  It is well settled that in interpreting a statute, the function of the court is to ascertain the intention of the legislature, as expressed in the legislation.  The statute must be considered as a whole, and any provision must be understood in its context in its widest sense, legal and social.  The court should adopt an interpretation which is consistent with and gives effect to the legislative purpose, as is emphasised by section 19 of the Interpretation and General Clauses Ordnance Cap 1.  This is sometimes called the search for a “purposive unity”.

30.  In this search, regard might be had to the Report on Bankruptcy of the Law Reform Commission of Hong Kong (“the LRC Report”), which made recommendations which were largely implemented through the Bankruptcy (Amendment) Bill 1996.  As was stated in the Legislative Council at the time, the then existing Bankruptcy Ordinance was based on obsolete English legislation from 1914.  The changes to be implemented were those broadly following the changes already implemented in the United Kingdom and in Australia.

31.  Those changes had shifted the emphasis more towards rehabilitation than punishment.  It seems to me that inherent in those changes, as were passed into what is now the BO, is the ability of a debtor to seek protection under the provisions of the BO when he genuinely is unable to pay his debts.

32.  (Incidentally, there is nothing in the record of the Legislative Council proceedings during the various readings of the 1996 Bill which throw light on whether or not the proper construction of section 3(1)precludes a debtor from presenting his own bankruptcy petition during the subsistence of his IVA.)

33.  For the purposes of looking for the proper statutory interpretation of section 3(1), it is helpful and necessary first to put it in its statutory context.

34.  Section 4 identifies the conditions to be satisfied in respect of a debtor when a petition is presented under section 3(1)(a)or(b). Essentially those conditions relate to physical presence in or sufficient connection to Hong Kong.  (There is no requirement to satisfy what might be described as a negative condition, such as not being subject to an extant IVA.)

35.  Section 5 refers to ‘Other preliminary conditions’.  Section 5(1) provides that

“Where a bankruptcy petition relating to a debtor is presented by a person who is entitled to present a petition under 2 or more paragraphs of section 3(1), the petition is to be treated for the purposes of this Part as a petition under whichever of those paragraphs is specified in the petition.”

36.  That a petitioner might be entitled to present a bankruptcy petition under two or more paragraphs of section 3(1) would seem to identify that those paragraphs cannot be mutually exclusive, and that no one paragraph is subject to any other.

37.  Section (3)(1)(c) needs to be read together with section 20L(1), for that section, headed ‘Default in connection with voluntary arrangement’, materially provides as follows:

“The court shall not make a bankruptcy order on a petition under section (3)(1)(c) (nominee of, or person bound by, voluntary arrangement proposed and approved) unless it is satisfied –

(a) that the debtor has failed to comply with his obligations under the voluntary arrangements; or

(b) that information which was false or misleading in any material particular or which contained material omissions –

(i) was contained in any statement of affairs or other documents supplied by the debtor under sections 20 to 20K to any person; or

(ii) was otherwise made available by the debtor to his creditors at or in connection with a meeting summoned under those sections; or

(c)that the debtor has failed to do all such things as may the purposes of the voluntary arrangement have been reasonably required of him by the nominee of the arrangement.”

38.  Within the sections dealing with voluntary arrangements, section 20H provides that where a creditors’ meeting approves the proposed voluntary arrangement (with or without modifications), the improved arrangement takes effect as if made by the debtor at the meeting, and binds every person who, in accordance with the rules Notice of, and was entitled to vote at, the meeting (whether or not he was present or represented at it) as if he were a party to the arrangement.

39.  It is section 20H, which creates a species of statutory contract for an IVA, which becomes binding on the debtor and his creditors referred to in that section: see also Davis v Martin-Sklan [1995] BCC 1122, at 1125.

40.  Possibly materially, the statement of affairs for a debtor’s petition required by Form 28C of the Bankruptcy Rules has questions 5(a)-(c) and 6 in List F.  The questions ask whether the petitioner has tried to come to an agreement with his creditors generally and if so why the attempt failed; also whether the petitioner thinks he would be able to introduce a voluntary arrangement for the creditors, which is likely to be acceptable to them.

41.  On one reading of those questions, they might appear to presuppose that at the time when the debtor presents his own bankruptcy petition, there is either no IVA in force or that any IVA has already been terminated.

Foreign legislation

42.  Mr Chan has drawn my attention to the fact that section 3(1) is very similar to, and was apparently based upon, section 264(1)(c) of the English Insolvency Act 1986. But in addition to the particular section, in England there are relevant rules which identify a specific answer to the question as to whether a debtor there as the necessary lockers to present his own bankruptcy petition if he is subject to an IVA.

43.  Rules 6.39(c) of the Insolvency Rules 1986 deals with the particulars which a debtor needs to give in a bankruptcy petition against himself, and provides that if at the date of the petition there is in force for the debtor an IVA, the petition must include a statement to that effect and the name and address of the supervisor of the IVA.   

44.  Rule 6.42(2A) provides that if a debtor’s petition contains particulars of an IVA in force for the debtor, the court shall fix a venue for the hearing and give at least 14 days’ notice of it to the supervisor of the IVA and the supervisor may appear and be heard on the petition.

45.  No similar rules have been adopted in Hong Kong.

46.  Mr Chan also drew my attention to the fact that in Australia, sections 55(5A)and(6) of the Bankruptcy Act 1966, specifically provide that the debtor who is a party to a subsisting Part X arrangement (similar to the IVA) or debt agreement (alternative arrangement available to debtors with small assets, liabilities and income) cannot petition for his own bankruptcy without permission from the court.

47.  There is no similar express provision in Hong Kong.

48.  There is no material in the Law Reform Commission Report, or in Hansard, which identifies any deliberate decision not to include in the Hong Kong scheme provisions similar to those in England and Australia just identified above.

Proper Interpretation

49.  I have little hesitation in deciding that the correct and proper interpretation of section 3(1) is that a debtor may present a petition for a bankruptcy order to be made against himself, notwithstanding that he is at that time, subject to an extent IVA.  He may do so under section 3(1)(b).

50.  Despite Mr Chan’s identification of the possible argument, I do not myself see any ambiguity in the meaning to be attached to section 3(1). 

51.  First, though I do not place any particular weight on the heading to the section, I think the heading ‘Who may present a bankruptcy petition’ is a fair and accurate summary of the actual terms of section 3(1).  Each of paragraphs (a) to (d) identifies a class of person or persons who may – that is, who is or are entitled to – present to the court a petition for a bankruptcy order.

52.  There is nothing on the face of section 3(1) which suggests that the paragraphs (a) to (d) are intended to be mutually exclusive.  In addition, I have already referred to section 5(1), which seems to make clear that those paragraphs cannot be mutually exclusive.  I also do not think there is anything that shows any one paragraph is subject to any one other paragraph.

53.  I agree with the Registrar that the words "(other than the debtor)" are simply part of the description of the class of persons entitled to present a petition under section 3(1)(c).  That also seems to me to be clear from the provisions in section 20L, which identify the circumstances of which the court has to be satisfied before it might make a bankruptcy order on a petition under section (3)(1)(c).  Those circumstances are apposite to a petition presented by the nominee or any person bound by an IVA, except the debtor himself.

54.  The introduction of the concept of an IVA was to provide a degree of flexibility not available under the terms of the old BO. Essentially, it provided a debtor with an opportunity to seek to make voluntary arrangements with his creditors, rather than almost necessarily face a creditor’s petition for a bankruptcy order.  Sections 20 to 20K provide for a scheme in which, whilst the debtor seeks to make voluntary arrangements with his creditors, those creditors are (for a limited period) prevented from presenting a petition. 

55.  It seems obvious that during the time a debtor is seeking to make voluntary arrangements with his creditors, he is unlikely to want to present his own petition for a bankruptcy order.  If agreement can be reached and an IVA comes into being, a debtor is also unlikely to want to present position so long as he can meet his obligations under the IVA.  But I do not see that he is, or should be, necessarily prevented from presenting his own petition should circumstances arise where the debtor thinks it appropriate to do so.

56.  As Mr Chan also submitted, the combined effect of section 3(1)(c), section 20H(1)(a) and section 20L is that a creditor who is bound by an IVA is specifically deprived of his fundamental right otherwise to present a bankruptcy petition under section 3(1)(a) on the grounds set out in section 6.  He can only present a petition against the debtor if he can make out one or more of the grounds set out in section 20L.

57.  But this is in contrast to the position of a debtor, in that there are no specific provisions in the Ordinance which deprive or curtail a debtor’s capacity to present his own bankruptcy petition under section 3(1)(b) on the ground that he is unable to pay his debts.

58.  That an IVA is a species of statutory contract binding on the debtor and his creditors referred to in section 20H(1)(a)(ii) does not seem to me to identify a need to find a different interpretation.  If a debtor is unable to meet its obligations under a commercial contract, he may present a debtor's petition seeking a bankruptcy order.  I do not see why that possibility should be different, simply because the relevant contract is one imposed by statute.  In either case, the debtor is unable to pay his debts and should be permitted to petition for his own bankruptcy under the statutory regime.

59.  With respect to the approach taken by the Master, the words “(other than the debtor)” do not seem to me on their ordinary meaning in context to restrict a debtor from presenting his own petition, simply because he is subject to an extant IVA.  The Master's approach seems to me to limit the context to section 3(1)(c) alone, whereas the proper context must be not only the whole of section 3, but that section within the whole of the BO.

60.  It might even be said that the exclusion of the debtor as being one of the persons who may present a petition under section (3)(1)(c) is actually a recognition of the fact that the debtor can in any event himself present a petition under section 3(1)(b) (though I do not place particular reliance on this argument).

61.  I also accept the powerful point made both by Mr Chan and by Miss Hui, for the debtor in HCB 3875/2012, that unless the BO specifically deprives the debtor of his locus to petition for his own bankruptcy when his IVA remains in force – which it does not – the debtor ought to retain the capacity provided under section 3(1)(b)to petition for his own bankruptcy.  Retention of that capacity seems to me to be entirely consistent with a purposive approach to the interpretation of the section in its statutory context.

62.  I also accept Mr Chan's submission that the concern expressed by Professor Fletcher, namely that a debtor may be tempted to exploit his position if he is entitled to petition for his own bankruptcy when his IVA is in force, can be fully addressed without having to construe section 3(1) to mean that such a debtor has no locus.

63.  The court has always had the discretion to dismiss a petition where its presentation amounts to an abuse of process: see section 3(2) and section 5(3).  A debtor’s petition taken out for the purpose of frustrating the objectives of an IVA and flouting the debtor’s obligations under his IVA might in an appropriate case be said to amount to an abuse of process which the court will not tolerate.

64.  In addition to dismissing petitions that amount to an abuse of process, the BO provides other sanctions which the court can apply to police and prevent any abuse: see, for example, section 33 (court’s power to annul bankruptcy order); section 49 (transactions at an undervalue); section 50 (unfair preference transactions); section 30A(8) (imposition, as a condition of discharge, of continued obligation to make contributions to estate); and section 98 (review and appeals).

65.  It also appears that creditors can also protect their own positions against potential abuse by dishonest debtors by structuring the terms of the IVA to provide that the IVA would survive the bankruptcy of the debtor: see In re N T Gallagher & Sons Limited [2002] 1 WLR 2380 at §54.

66.  I do not think I am particularly assisted by the existence of Rules 6.39(c) and 6.42(2A) in the English Insolvency Rules 1986. On one view, the rules might point to the proper interpretation being that a debtor has the necessary locus to present his own bankruptcy petition even when his IVA is still in force.  On another view, the rules might point to the need for them to be there so as to identify that that is the position, because the terms of the Act might suggest otherwise.

67.  Far better is it, in my view, simply to concentrate on the Hong Kong legislation and to construe the provisions in it in context.  This I have attempted above, and I have also stated that I have little hesitation when so doing in reaching my conclusion.

68.  Lastly, I should add that I do not think the possible reading of the content of the Form 28C is even potentially sufficient to outweigh the above matters so as to identify a legislative intent in Hong Kong that a debtor has no locus to present his own bankruptcy petition whilst his IVA is still in force.

69.  I am, therefore, satisfied that each of the petitions before me was properly presented by each debtor, notwithstanding that each debtor was then subject to an IVA which was yet to be terminated.

Any discretion?

70.  Though strictly I do not need to deal with this point, I respectfully disagree with the Registrar in his consideration that even if the debtor cannot present a bankruptcy petition during the subsistence of his IVA, that might trigger the exercise of discretion under section 124 not to invalidate the petition because the irregularity might not cause any substantial injustice or prejudice to any creditors or interested parties.

71.  The bankruptcy jurisdiction being a creature of statute, it seems to me that either a person has an entitlement to present a bankruptcy petition or he does not.  That is a matter of jurisdiction which does not give rise to the exercise of discretion.

72.  Therefore, had I taken the view that the petitions in this case were not properly presented because, on the proper construction of the statutory provisions, the debtors had no entitlement to present a petition, I think I would have been bound dismiss the petitions.

Conclusion and Orders

73.  Having determined that each of the debtors in HCB 3875/2012 and HCB 4147/2012 was entitled to have presented a debtor's petition seeking a bankruptcy order, I am able to consider whether or not to grant the orders sought.

74.  Though this is a matter of discretion, there is no basis upon which it would seem the orders sought should be refused.  Though the Official Receiver was in a neutral position as to the petitions themselves, Mr Chan confirmed to me that the Official Receiver saw no reason why a bankruptcy order might not be made on each petition.

75.  On the materials filed with each petition, it is apparently the case that the debtor is unable to pay his debts.  Accordingly, I grant a bankruptcy order on each petition.

Costs

76.  The costs consequences of the petitions themselves will be dealt with through the provision of the deposit, and from the consequences of the making of the bankruptcy orders.

77.  As to the costs of the argument on the proper construction of the statutory provisions, the Official Receiver accepts that the appropriate order is to make no order as to costs.  The Official Receiver has properly taken the view that the question dealt with is an important one, which she has brought before the court for determination.

78.  Accordingly, I make no order as to costs.