RE LI CHIU FAN

HCB 917/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 917 OF 1999

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REASONS FOR JUDGMENT

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Background

1. This is an application taken out by the Official Receiver and Trustee ("the Official Receiver) on 4th July 2003 objecting the automatic discharge of the bankruptcy order against the Bankrupt, Mr. Li Chiu Fan under Section 30(A)(3) the Ordinance.

2. The bankruptcy order against the Bankrupt was made on 4th October 1999 by Madam Justice Le Pichon (as she then was) after refusing the Bankrupt's request for further adjournment to apply for an interim order for an individual voluntary arrangement. Pursuant to Section 30A(1) and 2(a) of the Bankruptcy Ordinance ("the Ordinance"), if no objection was raised, the Bankrupt would have been discharged from bankruptcy on 4th October 2003.

3. The application was first heard before me on 30th July 2003. The Bankrupt appeared in person and indicated that he would oppose the Official Receiver's application. I accordingly gave directions for the Bankrupt to file and serve affirmation in opposition and the Official Receiver to file and serve a Report in reply. While adjourning the application for full arguments, an interim order was made suspending the automatic discharge pending the determination of the application ("the Interim Order").

4. The matter restored before me on 28th October 2003. The Bankrupt filed his affirmation and maintained his opposition to the application. The Official Receiver at the outset of the hearing sought leave to file and serve a 3rd Report disclosing the Statement of Affairs filed by the Bankrupt. With no objection raised by the Bankrupt, I granted leave to the Official Receiver to file the 3rd Report. At the end of the hearing, the Official Receiver sought leave to file a 4th Report to clarify the ownership of the horse in question. I gave leave for doing so and the 4th Report was filed on 29 October 2003.

5. After hearing the submissions of the Official Receiver and the Bankrupt, I find that the Official Receiver had established grounds under Section 30A(4)(c) and (d) of the Ordinance for objecting the automatic discharge of the Bankrupt and made an order suspending the automatic discharge of the bankruptcy of the Bankrupt for a period of 18 months so that the Bankrupt shall not be discharged until 4th April 2005. As the Official Receiver did not seek any costs against the Bankrupt, I made no order as to costs of the application. I indicated at the conclusion of the hearing that I would give my reasons in writing later, which I now do.

Official Receiver's Grounds of Objections

6. In this application, the Official Receiver has filed altogether 4 Reports in support.

7. In their 1st Report dated 4 July 2003, the Official Receiver relies upon 2 grounds under Section 30A of the Ordinance in support of the application, namely:-

(a)	the Bankrupt has failed to co-operate in the administration his estate under Section 30A(4)(c); and
(b)	the conduct of the Bankrupt either in respect of the period before or the period after the commencement of the bankruptcy has been unsatisfactory under Section 30A(4)(d).

8. The complaints of the Official Receiver against the Bankrupt focus on a race horse in the name of "Taxi Driver" with the Macau Jockey Club ("the Horse") which was used to be under the sole ownership of the Bankrupt prior to the date of the bankruptcy order. The Horse was disclosed as part of the assets of the Bankrupt in his Statement of Affairs dated 29 September 1999 filed in course of his opposition to the bankruptcy petition ("the 1st Statement of Affairs"). The Horse was valued by the Bankrupt at $200,000. However, the Horse was no longer disclosed in the later Statement of Affairs dated 21 February 2000 filed by the Bankrupt ("the 2nd Statement of Affairs") after the grant of the bankruptcy order.

9. When the Official Receiver made further enquiries about the Horse, it was disclosed by the Bankrupt that he had sold the Horse to a Mr. Lau Kit Ming ("Mr. Lau") who allegedly was a creditor of the Bankrupt at the price of $150,000. The Bankrupt produced an agreement dated 13 September 1999 and claimed that the Horse was sold to Mr. Lau to set off part of the debts owed by him to Mr. Lau. The Official Receiver has rightly pointed out to the Court that Mr. Lau was never mentioned in the 1st and the 2nd Statements of Affairs by the Bankrupt as a secured or unsecured creditor. Despite the said alleged sale, according to the information supplied by the Macau Jockey Club to the Official Receiver, the Bankrupt instructed a trainer to sell the Horse by tender on 14 September 1999. It was contended by the Official Receiver that if the Bankrupt had agreed to sell the Horse to Mr. Lau on 13 September 1999, he would not give such instruction to the trainer. The alleged sale appeared to be quite suspicious to the Official Receiver.

10. As confirmed by the Macau Jockey Club, the Horse was formally transferred from the Bankrupt to Mr. Lau on 10 October 1999 and was later transferred to the joint names of Mr. Lau and the Bankrupt since April 2000 up to now. At present, the Bankrupt is still one of the registered joint owners of the Horse.

11. Apparently, the Official Receiver being the trustee of the estate of the Bankrupt found such transfer most objectionable as it was purportedly made after the presentation of the petition and before the making of the bankruptcy order. The Official Receiver took the view that the transfer was void under Section 42 of the Ordinance and sought to sell the Horse. The Official Receiver called upon the co-operation of the Bankrupt to sign all necessary documents so that they could sell the Horse for the benefit of the estate.

12. In order to join the tender sale of the Horse organised by the Macau Horse Racing Company Limited in August 2002, the Official Receiver requested the Bankrupt to write to the Macau Jockey Club stating his wish to include the Horse for the said tender sale and specifying the reserve price and the intended recipient of the sale proceeds. The Bankrupt insisted that the Horse was no longer his asset and was holding the Horse in trust for Mr. Lau. Without the co-operation of the Bankrupt, the Official Receiver missed the opportunity to put the Horse for tender sale. Due to the lack of funding and the financial supports of the creditors, the Official Receiver has no financial means to commence legal proceedings to claim the ownership of the Horse or to conduct further examination of the Bankrupt.

13. It is submitted by the Official Receiver that the conduct of the Bankrupt, both in respect of the period before and after the commencement of the bankruptcy, has been unsatisfactory. The purported disposal of the Horse (which formed a substantial asset to the estate) to an alleged creditor of the Bankrupt before the making of the bankruptcy order amounted to a fraudulent preference. According to the Official Receiver, the Bankrupt failed to make full disclosure of his assets to the trustee and was uncooperative in the attempts made by the trustee to realise the asset. While the Horse is beyond the jurisdiction of Hong Kong, the uncooperative attitude of the Bankrupt coupling with the lack of funding rendered the realisation almost impossible. Accordingly, the Official Receiver sees fit to object the automatic discharge of the bankruptcy of the Bankrupt.

The Bankrupt's Case

14. Pursuant to my directions given on 30 July 2003, the Bankrupt filed an affirmation in opposition which exhibited his defence statement dated 21 July 2003 without anything further to add. The Bankrupt tried to explain that Mr. Lau is a powerful and influential person to whom he owed a sum of about $300,000. Mr. Lau, according to the Bankrupt, had on numerous occasions interrupted his daily life and caused inconvenience to his family members. As a result of such continuous pressure, he eventually agreed to sell the Horse to Mr. Lau on 13 September 1999 for the sum of $150,000 in partial repayment of the debt.

15. The Bankrupt explained that since he had included the Horse in 1st Statement of Affairs, this indicated his willingness to release the Horse to the Official Receiver. He had allegedly notified the Official Receiver to take action to claim the Horse from Mr. Lau but the Official Receiver failed to take any action to claim the Horse for auction. This allegation was refuted by the Official Receiver in their 2nd Report. The Official Receiver contended that he had endeavoured to put the Horse for tender sale in August 2002 as mentioned in paragraph 12 above.

16. The Bankrupt further tried to explain the transfer back of the Horse to him in April 2002 (which should be April 2000 according to the records of the Macau Jockey Club) in his opposing affirmation. He said that Mr. Lau is a superstitious person usually stayed in Canada. Since the transfer of the Horse to Mr. Lau, the Horse did not perform well and was "ill-health". Mr. Lau then suggested transferring back the title of the Horse to himself and Mr. Lau jointly in the shareholding of 1% and 99% respectively hoping that "this will bring him luck". The Bankrupt alleged that the Horse was transferred back to him against his will and without his knowledge. I must say at this juncture that I find such explanation totally unconvincing and I cannot believe that the Horse was transferred back to the Bankrupt without his knowledge.

17. At the end of the "Defence Statement" of the Bankrupt, he purported to put forward what I consider mitigating factors. The Bankrupt asked the Court to consider the pressure he experienced under his harsh situation and he was forced "unwillingly" and "passively" to make the "unwitting" decision. He said that he tried hard to pay the salaries to his employees despite his serious financial difficulties. He wished to stand up on his own feet to continue his career in the future as a hard-working merchant.

18. At the hearing on 28 October 2003, the Bankrupt during his submission tried to give further evidence not covered by his opposing affirmation to fortify his case. While I reminded the Bankrupt that he was supposed to confine his submission on the facts disclosed in his affirmation, the Bankrupt argued that he was just reorganising the events to avoid any confusion. Bearing in mind that the Bankrupt was not legally represented, in order not to cause any adjournment and delay the matter (which the Bankrupt did not wish), with the agreement of Ms. Mckenna representing the Official Receiver, I allowed the Bankrupt to proceed with his submission which included giving unsworn facts subject to any objection raised by the Official Receiver as to the admissibility of such unsworn facts. At the end of the case, no such objection was raised by the Official Receiver. In any event, I take the view that the unsworn facts are just touching on peripheral matters which did not advance the Bankrupt's case much.

19. In his submission, the Bankrupt explained that since the Horse was transferred to Mr. Lau in October 1999, he did not mention the Horse as his asset any more in the 2nd Statement of Affairs. He maintained that he had co-operated with Official Receiver and answered all their telephone calls and letters. He could do nothing as he had transferred the Horse to Mr. Lau.

The Law

20. The rationale and the purpose of the automatic discharge of a bankrupt are set out at paragraphs 17.16 and 17.24 of the Law Reform Commission's Report on Bankruptcy issued in May 1995 which read as follows:

"17.16 The introduction of automatic discharge should, with the objection system, have a two-fold effect. Firstly, bankrupts would have a greater incentive than at present to co-operate with the trustee, as failure to co-operate could result in the trustee objecting to a bankrupt's discharge. Secondly, the rehabilitation of a bankrupt from bankruptcy would be assured, subject to rehabilitation being delayed as a consequence of a bankrupt's own failings."

"17.24 The introduction of automatic discharge would shift the emphasis from discharge being a privilege to its being a right. This right, however, must be set alongside a bankrupt's duty to co-operate with the trustee in the administration of the estate. If he fails to co-operate with the trustee after bankruptcy, or if a bankrupt's conduct before bankruptcy was unsatisfactory, he should not be automatically discharged."

21. No doubt, "failure to co-operate" with the trustee is a reason for delaying the bankrupt's rehabilitation. Ms. Mckenna of the Official Receiver referred me to the often-cited passage in the Judgment of Madam Justice Le Pichon (as she then was) in Re Hui Hing Kwok [1993] 3 HKC 683:

"Rehabilitation in the sense of enabling the bankrupt to resume a normal life in society is a key, if not the key, consideration. It should only be delayed by a bankrupt's own failings."

22. Further, in Re Li Tat Kong [2000] 3HKC 360, Madam Justice Le Pichon stated clearly in her Judgment that it is incumbent on the bankrupt to make a full and frank disclosure and to proffer all pertinent information regarding his assets and financial dealings to the trustee. It is not good enough for a bankrupt to adopt a purely passive or reactive role, responding when asked in the expectation that with any luck, pertinent matters might be overlooked. The court will also have regard to the interests of commercial morality and the public interest.

The Exercise of Discretion

23. After considering the evidence of the Official Receiver, in the present case, I am satisfied that the Official Receiver has established a case of an objection to the automatic discharge of the Bankrupt under the 2 grounds relied upon by the Official Receiver pursuant to Section 30A(4)(c) and (d) of the Ordinance. There were and are failings on part of the Bankrupt such that it would not be appropriate for the Bankrupt to be automatically discharged.

24. Knowing quite well the imminence of the hearing of the bankruptcy petition and the possibility of granting an order against him, the Bankrupt decided to sell the Horse to Mr. Lau allegedly to set off debt owed by him to Mr. Lau. Such conduct was clearly unsatisfactory to the detriment of the interest of other creditors. Apart from making oral explanations, the Bankrupt failed to supply any concrete and convincing evidence to prove the genuineness of the alleged sale and the existence of debt owed by him to Mr. Lau.

25. Despite clear indication from the Official Receiver that the alleged sale was void against the trustee under Section 42 of the Ordinance, the Bankrupt made no attempt at all to assist the Official Receiver to recover the Horse nor making any application to court under Section 43D of the Ordinance to exclude the Horse from the estate. Instead of rendering co-operation with the Official Receiver to put the Horse for tender sale as requested, the Bankrupt kept on making, in my judgment, unconvincing explanations. The Bankrupt obviously chose to obey and comply with demands made by Mr. Lau rather than fulfilling his duties under the Ordinance to give full co-operation with the Official Receiver in administration of his estate. I have no doubt to conclude that such failings on part of the Bankrupt justify the delay of his rehabilitation.

26. The maximum period of suspension that the court can impose under Section 30A(3) is 4 years. Ms. Mckenna conceded during his submission that the present case is not a serious case which warrants the maximum suspension. In considering the proper and appropriate period of suspension in this case, I take into account that the Official Receiver's complaint against the conduct of the Bankrupt concentrates in effect on one single matter, that is the Horse which forms rather a substantial part in value of the assets of the Bankrupt. However, no complaint was made by the Official Receiver on other conducts of the Bankrupt for the past 4 years.

27. On the other hand, while considering an appropriate period of suspension which should commensurate with the gravity of the conducts of the Bankrupt under complaint, I also have to take into the mitigation factors put forward by the Bankrupt as mentioned above. In particular, I take into account the Bankrupt's explanation that the sale of the Horse was under continuous demand and pressure exerted upon him by Mr. Lau and he acted quite unwillingly. Although such explanation was doubted by the Official Receiver, I must say there is no evidence to contradict.

28. Having regard to the above matters, I consider that the appropriate period for suspension in this case should be 18 months. Accordingly, I order that the automatic discharge of the Bankrupt be suspended for a period of 18 months so that the Bankrupt shall not be discharged until 4 April 2005.