NG WING SHING v. SECRETARY FOR JUSTICE

HCMP 1236/2006

IN THE HIGH COURT OF HONG KONG

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 1236 OF 2006

(Application for leave to appeal

from DCCJ No.4599  Of 2004)

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REASONS FOR JUDGMENT

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Hon Yeung JA:

1.  I have had the advantage of reading the draft reasons for judgment of Yuen JA.  I agree with her view and would grant leave to appeal with costs in the appeal.

Hon Yuen JA:

2.  This was a renewed application for leave to appeal against the decision of Deputy District Judge E. Yip given on 17 March 2006 dismissing the Plaintiff’s action against the Secretary for Justice (as representative of the Government).  The action was dismissed (after trial) on the ground that the Plaintiff had no viable cause of action.  As the trial judge noted in para. 40 of his judgment, there were no disputes of fact. 

3.  Leave to appeal was refused by the trial judge and by Tang JA (now Tang VP) on a paper application.  As can be seen later, this matter involves arguments on bankruptcy law but unfortunately the Plaintiff was not legally represented.  Accordingly this court has had to take a view on certain legal issues doing the best it can without the benefit of legal arguments.  At the conclusion of the hearing, we gave leave to appeal.  My reasons appear below. 

Secured loan

4.  The Plaintiff was a civil servant who served as an engineer with the Civil Aviation Department.  In 1995, he applied for a Home Purchase Scheme loan (‘HPS’) from Government in respect of a property.   A loan of $540,000 was granted to him on the security of (1) a second mortgage over the property and (2) his salary and pension (see Re Choi Lai Ming ex parte The Official Receiver HCB 4390/2002, unrep., a decision of Barma J given on 21 October 2005 which establishes that under the HPS, the Government has security rights over civil servants’ salaries and pensions).  Every month, a sum of about $6,000 was deducted from the Plaintiff’s salary towards repayment of the HPS loan, an arrangement which he could not unilaterally revoke. 

Bankruptcy

5.  The Plaintiff became bankrupt in July 1999.  Accordingly his property became vested in the Official Receiver (‘OR’).  It is undisputed that this entitled the Government to immediate repayment of the outstanding balance of the HPS loan, then about $367,000.

Government not  treating salary and pension as security

6.  I have mentioned that the HPS loan was secured, not only by the property, but also by the Plaintiff’s salary and pension.  (I need not mention the property any further as it was not even enough to satisfy the debt owed to the first mortgagee).  As far as the salary and pension were concerned however, at the time when the Plaintiff became bankrupt, the Government apparently took the position that these were not security for its loan.

7.  The Government lodged a Proof of Debt in which it listed only the second mortgage over the property as security.  In other words, the Government excluded the Plaintiff’s salary and pension as its security.  The proof of debt was admitted by the OR.

Arrangement

8.  Accordingly from July 1999 onwards, the Government paid the Plaintiff his entire salary every month, and it proved in his bankruptcy for $367,000 being the entire balance outstanding on the HPS loan. 

9.  On this basis, the Plaintiff had an arrangement with the OR whereby he paid $23,600 every month to the OR as his trustee in bankruptcy.  The Government received 2 dividends in the total sum of about $38,000 in January 2001 and January 2002.  This was the situation which prevailed for 39 months from July 1999 to October 2002.

Reversal of position - Government treating salary and pension as security

10.  In November 2002 however, the Government "reconsidered" its position after receiving legal advice.  It resumed making deductions of about $6,000 from the Plaintiff’s salary.  The Plaintiff objected, but of course he had no authority under his terms of service with the Government to override the deductions.  The OR thereupon reduced the monthly sum payable by the Plaintiff to $17,600.

11.  In April 2003, the Government withdrew its proof of debt, at which time the OR asked the Government what it was prepared to do with the previous dividends paid to it.  In June 2003, the Government repaid to the OR the dividends it had received.  The Plaintiff says he was not consulted or notified before the OR permitted the Government to withdraw its proof of debt. 

12.  As I said, after November 2002 the Government deducted $6,000 from the Plaintiff’s salary every month again, and the Plaintiff paid the reduced sum of $17,600 to the OR every month until he was discharged from bankruptcy in July 2003. 

13.  The Plaintiff retired in December 2003.  On his retirement, the  Government deducted a net sum of $398,378.07 from the Plaintiff’s pension (or more accurately, his commuted pension gratuity).  This comprises the entire outstanding balance of the HPS loan as at the date of bankruptcy (i.e. the $367,000) plus interest at the normal rate under the HPS (the additional interest of 5% for non-repayment having been waived by the Government) for the 39 months (but presumably less deductions after the 39 month-period). 

14.  Before I consider whether this can give rise to any cause of action that the Plaintiff may have against the Government, it may be useful to first compare the effect of the treatment of the HPS loan as

(a) an unsecured loan and

(b) a secured loan

on the Plaintiff’s finances.  (When I use the term "unsecured", I mean unsecured by the salary and pension, as opposed to the valueless security over the property).

Effect

15.  I emphasize this is only a provisional view as this is an ex parte application.  On the view taken by the Government that the loan was not secured on the Plaintiff’s salary and pension,

-	the loan due by the Plaintiff to the Government was not reduced by $6,000 each month, with the result that:
	(a)	he had that much more to pay the OR every month, but
	(b)	more interest accumulated on the HPS loan;

however,

-    interest is not provable (s.71 Bankruptcy Ordinance), so the total indebtedness of the estate is not increased by the interest element, and

-    upon discharge from bankruptcy, the Plaintiff would be discharged from all his debts (including the HPS loan and the interest thereon), so

-    after his discharge from bankruptcy, the Plaintiff would be able to enjoy the benefit of his pension in its entirety.

16.  If however the Government had taken the view from the start that the loan was secured on the Plaintiff’s salary and pension, then

-	the Government could have carried on deducting $6,000 from the Plaintiff’s salary every month, with the result that:
	(a)	he would have that much less to pay the OR every month (so his unsecured creditors would have been disadvantaged, but he would not, as discharge is normally automatic after 4 years); but
	(b)	less interest accumulated on the HPS loan;

 however,

-    interest would continue to accrue, and

-    since the HPS loan was secured, he would not be discharged from this indebtedness on discharge from bankruptcy, so

-    after his discharge from bankruptcy, the Plaintiff would remain liable to pay his indebtedness to the Government out of his pension.

Issue

17.  So the issue is: was the Government entitled after 39 months to reverse its position from treating itself as unsecured by the salary and pension to treating itself as secured?

Was security over salary and pension surrendered?

18.  Before the trial judge, the Government argued that a creditor was entitled to choose whether and when to enforce a security on a loan.  That is of course correct as a matter of general principle, but in the present case, it is arguable (and I need put it no higher at this stage) that the Government had surrendered the security over the salary and pension when it excluded that security and proved in the Plaintiff’s bankruptcy for the entirety of the outstanding HPS loan.

19.  Rule 99I of the Bankruptcy Rules provides:

"(1)    For the purpose of voting, a secured creditor shall, unless he surrenders his security, state in his proof the particulars of his security, the date when it was given and the value at which he assesses it, and shall be entitled to vote only in respect of the balance (if any) due to him after deducting the value of his security.

(2)     If he votes in respect of his whole debt he shall be deemed to have surrendered his security unless the court on application is satisfied that the omission to value the security has arisen from inadvertence".  (Emphasis added).

This is based on rule 10 of the First Schedule of the Bankruptcy Act 1914 (Williams and Muir Hunter on Bankruptcy 19^th ed. p.520)

20.  From the documents before this court, it is not known whether the Government voted in any meetings of creditors.  The Plaintiff was not informed of any meetings of creditors and was unable to assist us in this respect.  In any event I would have thought it arguable that even if no meeting had taken place, the effect of the Government having excluded the Plaintiff’s salary and pension from the particulars of security in its proof of debt would have had a similar effect.  In England, rule 5 of the Second Schedule expressly provided that the omission to state the existence of any security forfeited the security except in case of inadvertence (Williams and Muir Hunter p.524).

Withdrawal of proof

21.  Of course the Government did withdraw its proof of debt, but only after 39 months, during which the Plaintiff had paid $23,600 every month to the OR on the basis that he had no further liability under the HPS loan separate from that under his bankruptcy. 

22.  It is not clear whether any question of estoppel was considered when the Government was allowed to withdraw its proof of debt.  If the application for withdrawal had come before the court, there is at least a possibility that it would not have permitted the Government to withdraw the proof given the detriment suffered by the Plaintiff (discussed in paras. 15-16 above).  An example of a case where the court did not permit a creditor to withdraw a proof is In re Rowe ex parte West Coast Gold Fields Ltd [1904] 2 KB 489.  Apparently the withdrawal in the present case was not made the subject of an application to the court.  It is not known whether the OR had these matters in mind when it consented to the Government withdrawing the proof.

23.  In the circumstances, I take the view that it is arguable that the trial judge erred in dismissing the action on the ground that the Plaintiff had no viable cause of action against the Government.  On the basis of the matters discussed above, the Plaintiff may be entitled to a declaration that by reason of the Government excluding its security over his salary and pension in the proof of debt, it had surrendered that security and he might claim for money had and received being the salary and pension deducted after November 2002; or he might claim that the Government was estopped from asserting that it had security over the salary and pension, the Plaintiff having acted to his detriment by making larger payments to the OR than he would have if the Government had not represented in its proof of debt in effect that he had no further liability to it under the HPS loan as a secured loan.  At the very least, the Plaintiff seems to have a valid claim to the interest charged by the Government which was calculated on a constant principal during the whole of the period of 39 months rather than on a diminishing principal. 

24.  I am aware that this was not exactly the way in which the Plaintiff framed his case in the District Court, but he did not have the benefit of legal representation and it seems clear enough from his statement of claim that he was claiming compensation for the Government’s conduct in ‘approbating and reprobating’ its position as an unsecured creditor.  The law in this case is not simple and I hope some way may be found for the Plaintiff to have legal representation at the hearing of the appeal, not only for his benefit, but also to assist the court.  The Plaintiff informed the court that he was not able to satisfy the means test for legal aid.  He was informed that it would be in his interests to approach other sources of free legal advice and representation.  

Order

25.  For those reasons I gave leave to appeal and gave an order that the costs of the application be costs in the appeal.