SUEN KIN NING v. THE INCORPORATED OWNERS OF TSUI WAH BUILDING AND ANOTHER

CACV 167/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 167 OF 2010

(ON APPEAL FROM HCB NO. 8042 OF 2009)

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BETWEEN

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J U D G M E N T

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Hon Rogers Acting CJHC:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal by the Official Receiver and a cross appeal by the debtor from an order of 8 July 2010 of Barma J.  The matter before the judge concerned an application by the debtor that the fees due (estimated to be approximately $2.3 million) from the debtor to the Official Receiver be remitted absolutely or on such terms as the court may think fit.  The judge ordered that the fees be remitted to the extent of $1.5 million and that the Official Receiver’s costs of $70,000 be paid by the debtor.  At the conclusion of the hearing judgment was reserved which we now give.

The background facts

3.  This is an unusual case.

4.  The debtor became the registered owner of a shop (“the property”) in a building known as Tsui Wah Building (“the building”) located in Sai Ying Pun in December 1987.  At all material times the property had been let to Sonic Auto Services Ltd (“the tenant”) who, under the terms of the tenancy agreement, was responsible for the payment directly to the incorporated owners of the building (“the petitioner”) of all service and maintenance charges payable by the owner or occupier under the DMC.

5.  The debtor emigrated to Canada in 1993, returning to Hong Kong from time to time.  He maintained a residence in Hong Kong situated at Yee Wo Street.  His last visit to Hong Kong was in early 2007. He left for Canada in April 2007 and since then has been unable to travel due to ill health.  The debtor is 75 years old and lives in a care centre in Canada.

6.  On 8 April 2008, the petitioner obtained an award against the debtor from the Small Claims Tribunal in respect of unpaid renovation contributions aggregating $49,750 and costs of $220.  On 28 April 2008, the petitioner registered a charge dated 22 April 2008 against the property.

7.  Notwithstanding the registration of the charge, on 23 December 2008, the petitioner issued a statutory demand against the debtor in the sum of $85,551.59 comprising the award, unpaid management fees from 1 August 2007 to 31 December 2008 and the third instalment of the renovation contribution.  The petitioner served the statutory demand and a letter of appointment on the debtor by sending them to the property on 2 January 2009 as inquiries as to the debtor’s whereabouts had apparently yielded no results.

8.  Although the petitioner was informed by the tenant that the statutory demand had not been passed to the debtor, the petitioner proceeded to obtain leave on 21 May 2009 to file a bankruptcy petition against the debtor.  The application was made, inter alia, on the bases that the debtor had “absconded or is keeping out of the way with a view to avoiding service” of the statutory demand and that there were “no other available/other assets of the Debtor to the Petitioner available for execution” such that there was “no prospect of the sum due been recovered by execution or other means”.

9.  The petitioner presented a bankruptcy petition in June 2009 based on the debtor’s failure to satisfy the statutory demand. The petition stated, inter alia, that the petitioner

“does not nor does any person on its behalf, hold any security on the Judgment Debtor’s estate, or any part thereof, for the payment of the above-mentioned sum.”

The verifying affirmation was to the same effect.

10.  The petitioner then obtained an order for substituted service.  A bankruptcy order was made on 5 August 2009.

11.  The debtor first became aware of the award, the statutory demand, the petition and the bankruptcy order when, on or about 8 October 2009, the debtor’s daughter found the letter dated 2 October 2009 from the Official Receiver to the debtor sent to his Hong Kong residence.  It would appear that that address is shown in the tenancy agreement as the address of the landlord i.e. the debtor.

12.  The debtor’s statement of affairs filed on 9 December 2009 revealed assets within Hong Kong worth in excess of $27.5 million and a sole creditor, namely, the petitioner.  Meanwhile, on 5 November 2009, the Official Receiver agreed to pay the petitioner its costs in the sum of $45,000.

13.  On 16 December 2009, the debtor issued proceedings under section 33(1) of the Bankruptcy Ordinance to annul the bankruptcy order.

14.  The Official Receiver filed his report dated 31 December 2009 to the effect that the debtor was “obviously solvent”, that the bank balances realised exceeded $15.7 million and that the Official Receiver’s fees and disbursements including settlement of the petitioner’s costs were estimated at $2,312,563.89 and $55,000 respectively.

15.  On 4 January 2010 the debtor made an application under section 114(2) of the Bankruptcy Ordinance for an order that the fees due to the Official Receiver be remitted absolutely or on such terms as the court may think fit (“the fees summons”).  It is common ground that the actual time costs incurred by the Official Receiver is of the order of $70,000.

16.  The bankruptcy order was annulled on 5 February 2010 by the judge who dismissed the petition and ordered the debtor to pay the Official Receiver’s costs of $6,200 incurred for that application.  The order which is the subject matter of the appeal and cross appeal was made on 8 July 2010.

The appeal and cross appeal

17.  The court has a discretion under section 33(1) of the Bankruptcy Ordinance to annul a bankruptcy order if (a) the order ought not to have been made; or (b) the provable debts and expenses have all been paid or secured.  Although the debtor had elected to pursue an annulment under subclause (b), the court is not precluded from giving to consideration to the circumstances in which the bankruptcy order came to be made.  To the contrary, on the hearing of applications to annul a bankruptcy order under section 33(1) on the grounds of payment of the proved debts in full, the practice is to consider those circumstances as well as the conduct of the bankrupt: Muir Hunter on Personal Insolvency, Vol 1, § 3-591.

18.  In my view the judge ought not to have declined to rule on whether or not an application under subclause (a) would have been successful.  Quite simply, this is a case where the petitioner was a fully secured creditor.  It is undeniable that a charge had been registered against the property well before the commencement of the bankruptcy proceedings.  Had the existence of the charge been disclosed, leave for the filing of the bankruptcy petition would never have been obtained because there would have been no grounds to justify such leave.  In that connection, for my part, I take a dim view of the conduct of those responsible for the failure to disclose.  In those circumstances, it is clear that a bankruptcy order ought not to have been made.  Such a conclusion is ineluctable from the facts and is not a matter that admits of any contrary argument.  I would add that the estimated value of the property which appears in the statement of affairs is $5.5 million.  In any event, since the property was otherwise unencumbered, given the size of the debt, by no stretch of the imagination could it have exceeded the value of the property.

19.  The consequences of an annulment in relation to the assets of the debtor are dealt with in section 33(4) which provides as follows:

“Where the court annuls a bankruptcy order under this … section …, any sale or other disposition of property, payment made or other thing duly done by or under the authority of the Official Receiver, a nominee or a trustee or by the court is valid, but if any of the bankrupt’s estate is then vested in such a trustee, it shall vest in such person as the court may appoint or, in default of any such appointment, revert to the bankrupt upon such terms (if any) as the court may direct, and the court may include in its order such supplemental provisions as may be authorised by the rules.”

20.  In adjudicating on the meaning of a similar provision under the Bankruptcy Act 1869, in a case where the bankruptcy order was annulled, Cockburn CJ held that:

“The effect …is, subject to any bona fide disposition lawfully made by the trustee prior to the annulling of the bankruptcy, and subject to any condition which the court annulling the bankruptcy may by its order impose, to remit the party whose bankruptcy is set aside to his original situation.”

Therefore, subject to any bona fide disposition made by the Official Receiver prior to 5 February 2010 and subject to any terms imposed by the judge, the debtor’s estate which was vested in the Official Receiver must revert to the debtor.

21.  While the court has a discretion under section 33(4) to impose conditions, when imposing conditions, the court must have regard to those provisions.  It is to be noted that on annulling the bankruptcy order the judge did not impose conditions other than to order the debtor to pay the Official Receiver’s costs of $6,200 incurred in relation to the application to annul.  Since the fees summons was then pending, the applicable principles cannot depend on whether the issue of fees (which was pending) was dealt with as a term or condition of the annulment or (as has happened in the present case) subsequently at a separate hearing. Regard must still be had to the provisions of section 33(4).

22.  Mr Suen who appeared for the Official Receiver submitted that a remission should not be ordered merely because of a disparity between the scale fees and the actual time costs and, further, that in the absence of hardship, the court should not exercise its powers of remission under section 114(2) of the Bankruptcy Ordinance.  It was said that such disparity is irrelevant, inter alia, because “Government policy” is such that remunerative bankruptcy cases should cross-subsidise non-remunerative cases.

23.  The following observations would appear to be apposite on the question of “Government policy”.  First, the legislation is silent on that issue. Second, such a policy (of cross-subsidy) contradicts section 115 of the Bankruptcy Ordinance which provides for the payment into the general revenue of all fees and remuneration received by the Official Receiver.  In short, the so-called “Government policy” is wholly unsubstantiated.

24.  An estimated breakdown of the Official Receiver’s the fees was before the court.  In summary, it comprises the following items:

	HK$
Table A, Item 18 (Notices in Gazettes)	1420.00
Table B, Cap item 1 (10% Realisation fee)	1,576,653.89
Table B, Cap item 3 (5% Distribution fee)	4918.18
Table B, Item 5 (Official Stationery)	670.00
Table B, Item 9 (Ad valorem fee)	650,340.00
Table A, Item 14 (fee to Court for release)	78,835.00
	_____________ 2,312,837.07

25.  The Official Receiver’s claim for fees is based on the fees prescribed in the Bankruptcy (Fees & Percentages) Order, Cap. 6C.  He has no power to waive or enter into any compromise over the amount of the prescribed fees under the Bankruptcy Ordinance.  That situation was considered “unsatisfactory” (see Re: To Chuck Lai, unreported, HCB 849/1995, 12 June 2000) but, regrettably, nothing seems to have been done about it in the decade that has elapsed since that decision.  So the situation continues to be “unsatisfactory”.

26.  Be that as it may, the court is not subject to such constraints.  It was accorded a wide discretion by section 114(2) to remit “any particular fee or fees … either absolutely or on such terms as it may think fit.”  As earlier noted, when the discretion has to be exercised in the context of an annulment, the provisions of section 33(4) are relevant and cannot be ignored.  In ordinary parlance, an annulment can only mean that the matter or event annulled must be regarded as having had no legal existence.  In other words, what one should seek to do is to restore the status quo ante.  In my view, section 33(4) should be given effect to the extent possible without compromising what should fairly and properly be allowed by way of fees having regard to all the circumstances.

27.  In the present case, according to the estimated breakdown provided, the Official Receiver seeks “realisation fees” of approximately $1.57 million.  In other words, the assets “realised” were said to have a value of $15.76 million.  The statement of affairs reveals that the debtor had cash deposited in bank accounts of only about $11.66 million.  How that has become $15.76 million is not explained.  Assuming that cash had been transferred to the Official Receiver following the bankruptcy order, the shortfall or difference could be accounted for by the $1.8 million owing by the tenant under the tenancy agreement and the value of one share in a private company estimated at $315,000.  But there was no evidence to suggest that those assets have been “realised” since the $15.76 million was referable to ‘bank balances’ only.  The rest of the estate is made up of 6 properties owned by the debtor.  This puts into perspective the ‘work’ that the Official Receiver had actually undertaken in the short-lived ‘bankruptcy’.

28.  In my view, it is only reasonable to infer that the legislature intended the scale fees to reflect and be commensurate with the responsibility that goes with being the trustee in bankruptcy.  A bankruptcy would not normally result unless the bankrupt’s debts exceed his assets.  Not only will the trustee have to get in all the assets, he will have to realise them by turning them into cash before a dividend can be paid to the creditors.  Generally speaking, the larger the estate, the more complex the administration of the estate becomes.  Often it would require the trustee to exercise his judgment and make difficult decisions.

29.  But the present case is not the run-of-the-mill or typical bankruptcy.  The Official Receiver as trustee has had to do very little beyond taking over the cash assets of the debtor and to settle the single debt of under $100,000.  As earlier noted, but for the nondisclosure of the fact that the petitioner was a fully secured creditor, bankruptcy proceedings would have been out of the question.  Given those circumstances, the suggestion that scale fees of the order of $2.3 million should be paid is both scandalous and outrageous.

30.  It is, of course, appreciated that the Official Receiver cannot of his own volition waive fees to which his office could claim to be entitled.  The constraints of those in public office in relation to their official duties are something which the court must respect.  It has come to public knowledge that the effect of multiple bankruptcies in Hong Kong in recent years has put considerable manpower and financial difficulties on the office of Official Receiver.  Nevertheless, it is the court’s function to ensure that the present legislation does not result in a wholly inequitable imposition of a financial burden where it is not justified or justifiable.  The court cannot sanction the fees and costs which are sought to be charged in this case on the basis of subsidising the cost of operations of the Official Receiver.

31.  In my view, this is a case that cries out for the exercise of the court’s discretion to remit and in the exercise of that discretion, the objective of section 33(4) needs to be borne firmly in mind.  In the circumstances, I consider that the remission should extend to all the fees of the Official Receiver save for the amount of $70,000 reflecting actual time costs incurred.  I would allow, by way of disbursements, the cost of publishing notices in gazettes (Table A, Item 18).

32.  At the hearing, the Official Receiver was asked to clarify the status of the consent summons dated 5 November 2009 relating to the petitioner’s costs of $45,000 and the reference in his report to the settlement of the petitioner’s legal costs estimated at $55,000.  Since the hearing, the court has been informed that payment of $45,000 was made on 15 July 2010.  Had the amount not already been settled, I would not have considered it appropriate to award the petitioner any of its costs given the nondisclosure.  However, since the agreement to settle the petitioner’s costs of $4,500 occurred prior to the annulment, it comes within the bona fide disposition exception contemplated by section 33(4).  Accordingly, the Official Receiver is entitled to be reimbursed the amount of $45,000 so paid.

Order

33.  I would dismiss the appeal, allow the cross-appeal and set aside order below.  I would order that the fees of $2,312,837.07 be remitted except for the sum of $70,000.  The Official Receiver is allowed, by way of disbursements, the sums of $1,420 and $45,000 respectively.  I would also make an order nisi of costs in favour of the debtor.

Hon Cheung JA:

34.  I agree.

Hon Rogers Acting CJHC:

35.  Accordingly, there will be an order in terms of paragraph 33 above.