FRED LEE AND ANOTHER v. LAM KWOK KEUNG

HCB 22795/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 22795 OF 2002

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REASONS  FOR  DECISION

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Background

1. In this case, Bank of China (Hong Kong) Limited issued a bankruptcy petition against the Bankrupt on 6 November 2002 on ground of his inability to pay debts. A bankruptcy order was made against the Bankrupt on 15 January 2003.  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 15 January 2007. 

2. Mr. Fred Lee and Ms. Christine Chow were appointed by a resolution of the creditors of the Bankrupt as the joint and several trustees of the property of the Bankrupt (collectively referred as “the Trustee”).

3. The Trustee saw fit in this case to object the automatic discharge of the Bankrupt.  A summons was issued by the Trustee on 8 December 2006 against the Bankrupt under Section 30A(3) of the Ordinance seeking an order that the period for the discharge of the Bankrupt should cease to run.  The sole ground relied upon by the Trustee to object is under Section 30A(4)(d) of the Ordinance that the conduct of the Bankrupt in respect of the period before the commencement of the bankruptcy had been unsatisfactory.

4. The application was first heard by Master Hui on 12 January 2007.  The Bankrupt attended the hearing in person and indicated to oppose the summons.  Master Hui gave directions for parties to exchange evidence by way of affirmations and adjourned the Trustee’s application for arguments.  While adjourning the summons, an interim order was made suspending the automatic discharge pending the determination of the application (“the Interim Order”). 

5. The substantive arguments of the summons were heard by me on 17 May 2007.       In course of hearing the submissions of the parties, it turned out that there were factual disputes on matters which parties sought to file further evidence. Directions were given to file and serve further affirmations by parties and the hearing was adjourned part-heard.

6. Altogether, the Trustee had filed 3 Affirmations in support of the summons while the Bankrupt had filed 2 Affirmations in opposition.  The hearing was restored before me on 24 August 2007.  After reading all the affirmations filed and hearing the arguments of the Trustee’s solicitors and the Bankrupt, I ordered that the relevant period under the Ordinance do cease to run for a period of 9 months from 14 January 2007.  No application was made by parties for costs of the summons and I made no order accordingly.

7. At the conclusion of the hearing, I indicated that I would give my reasons in writing later, which I now do.

Unsatisfactory Conducts

8. Like many other cases recently heard in this Court brought up by the same Trustee, the Trustee relied upon Section 30A(4)(d) of the Ordinance to object the automatic discharge of the bankruptcy of the Bankrupt.  Their complaint focused mainly on the alleged unsatisfactory conducts on part of the Bankrupt prior to the commencement of the bankruptcy ie. before the grant of the bankruptcy order in January 2003.  It is worth noting that the Trustee has no complaint whatsoever for the conduct of the Bankrupt during the course of his bankruptcy for the past 4 years.

9. The pre-bankruptcy conducts of the Bankrupt in question complained by the Trustee can be summarized as follows:-

(1)	Contracting debts proveable in bankruptcy while being insolvent or without any reasonable belief of being able to repay (hereinafter referred as “Contracting Debts during Insolvency”);
(2)	Engaging in excessive and totally disproportional investment in properties both locally and overseas involving at least 5 properties in Hong Kong and 13 properties in Australia and New Zealand (hereinafter referred as “Disproportional Properties Investment”); and
(3)	Making a misrepresentation in the application form submitted for the Wing Hang Credit Card (hereinafter referred as “Misrepresentation”).

Contracting Debts during Insolvency

10. At all material times, the Bankrupt was employed as a lecturer with the City University of Hong Kong.  In the financial years of 2001/2002 and 2002/2003, he was earning an average monthly income of about $116,000 and $97,000 respectively before tax while at the time of this application, he was earning about $57,000 per month.  He was and is the sole breadwinner of the family and has to support his wife and a son.

11. It is the Trustee’s case that in August 2001, the Bankrupt should not have obtained loans from Post East Finance Ltd.(“Post East Finance”) to finance the completion of the purchase of a property at Flat A, 26^th Floor, Winsome Park, 42 Conduit Road (“Winsome Property”).  The purchase price was $7,210,110.  The purchase was substantially financed by term loan and mortgage provided by the developer.

12. There was originally confusion on part of the Trustee as to when the Winsome Property was purchased.  In the 1^st Affirmation of the Trustee, he said that the purchase was in August 2001 (see paragraph 27).  Such allegation was disputed by the Bankrupt at the hearing in May this year.  The Bankrupt argued that the purchase was made in 1996 and the transaction in August 2001 was just a restructuring of the loan.  As a result of such dispute, the hearing in May was adjourned so that the Trustee could investigate the matter further and parties to file supplemental affirmations.

13. It was clarified in the 4^th Affirmation of the Trustee that the Agreement for the Sale and Purchase of the Winsome Property was signed in March 1996 and the Bankrupt had paid 10% of the purchase price as deposit.  At the request of the Bankrupt, the completion of the sale and purchase was deferred upon the Bankrupt paying a monthly instalment of $63,699 which sum was reduced to $42,000 in January 1999.  Although possession of the Property had been delivered to the Bankrupt in March 1996, the completion of the sale and purchase was not done until August 2001 when the Assignment was executed and the Mortgage was signed by the Bankrupt.  The Bankrupt obtained from the Post East Finance an instalment loan of $5,160,000 (repayable by 348 monthly instalments of $40,000 each) and a term loan of $2,170,000 repayable by a lump sum on or before 30 September 2003.  Obviously, if the Trustee had investigated the matter properly before taking out this application, such information should be rather apparent from the land search records and the documents registered at the Land Registry and the adjournment of the hearing could be avoided.

14. According to the information obtained by the Trustee, by September 2000, the Bankrupt had to pay a total of $113,598 per month for his unsecured loans.  The particulars of the said 9 loans are as follows:-

15. Adding the monthly sum of $40,000 payable to the Post East Finance, the Bankrupt by then had to repay a monthly sum of $153,598.  The same had not taken into account the Bankrupt’s liabilities to pay other mortgages for his properties in Hong Kong, Australia and New Zealand (which will be discussed later in this Judgment), 5 other overdraft facilities and revolving loans, 17 credit cards and his household expenses.  By then, he was earning a sum of about $116,000 before tax per month.  Furthermore, the Bankrupt was sued by the Bank of China for a loan guaranteed by both the Bankrupt and his wife and a judgment was obtained against the Bankrupt in January 2001 under HCA 10456 of 2000 for the sum of $2,439,267 plus interest and costs.  No payment was made by the Bankrupt for the said Judgment debt and the bank has to dispose of the underlying security in July 2001 with a balance of Judgment debt of $1,217,222.  The Bankrupt was fully aware of the same.

16. Taking into account of the above, it was the Trustee’s contention that at that time, the Bankrupt should have known that he was insolvent or that he would know that he would be unable to repay his liabilities.  The Bankrupt should not contract the debts with the Post East Finance to induce the developer to pass the beneficial title of the Winsome Property to him.

17. The Bankrupt has no disputes as to the particulars as stated above.  However, he maintained that he had ability to repay the loans and mortgages at the time when he applied for them. He could keep up of all his mortgage payments for a number of years until 1997 when there was the economic crisis.  By then, he kept on repaying his creditors and if not, there would be legal actions brought against him much earlier than 2001 when he was sued by the Bank of China.  All through, the Bankrupt had endeavoured very hard to balance out every assets and liabilities and negotiated with his creditors to restructure the monthly payments to an affordable level.

18. During the investigation by the Trustee, the Bankrupt denied that he was aware of his financial difficulties at that time.  However, the Bankrupt eventually accepted in course of the hearing on 24 August 2007 that when he asked the developer to reduce his monthly instalments for the Winsome Property in January 1999, he knew that he was already in financial difficulty.  In any event, by the time of January 2001 after the Bank of China obtained the Judgment against the Bankrupt, the Bankrupt should no doubt aware that he was in real financial difficulty.

19. The Bankrupt denied that he got any benefit out of the completion of the purchase of the Winsome Property in August 2001.  He rather suffered a detriment because of the fall in the value of the property since the signing of the agreement and the completion.  He asserted that he was induced by the developer vendor to complete the purchase; otherwise, the developer would not consider his restructuring proposal and would take legal action against him.

Disproportional Properties Investment

20. The Trustee took the view that the number of landed properties purchased by the Bankrupt was excessive and totally disproportional to his financial abilities. 

21. Altogether, the Bankrupt has interest (solely in his own name and jointly either with his wife and other persons) in 6 properties in Hong Kong and 18 properties in Australia and New Zealand.  As a result of the bankruptcy, proofs of debt were filed amounting to a total sum of exceeding HK$28 million out of which about $19 million was claims lodged by the mortgagee banks for deficit after disposal of the properties involved.

22. Particulars of the 6 Hong Kong properties and 6 overseas properties where proofs of debt were received are listed in Schedule 1 attached to this Decision. The Schedule was prepared by the Trustee’s solicitors and the Bankrupt agreed with its contents.  For the other 12 overseas properties which the mortgagees have not filed proof of debt up to now, the Trustee has no information as to their current status.  Taking into account of the fact that the Bankrupt is a lecturer at a university and his then earning ability and financial condition, the Trustee finds that such conduct is unsatisfactory.

23. The Bankrupt did not accept that he was at the material time engaging into disproportionate properties investment or speculative activities and that his conduct was unsatisfactory. He treated them as long-term investment.  He argued that apart from his monthly salary, he had savings and other rental income to support his credit and mortgage facilities.  Further, some of the properties were joint investment and his partners would contribute to the payments of the mortgages.  For the first few years, there was appreciation of the value of the properties. He fell into the financial difficulties only after the economic crisis in 1997. After then, he kept on repaying the mortgages hoping that the market might revive shortly.

24. The Bankrupt accepted that he might have made a misjudgement in 2001 due to uncontrollable and unforeseen events.  He claimed in the course of his submission that his conduct was satisfactory originally but turned into unsatisfactory later.         

Misrepresentation

25. The Trustee also complained against the Bankrupt for failure to disclose his full financial situation when he applied for a credit card with the Wing Hang Bank Limited (“Wing Hang”) in December 1999.

26. The application form (p.173 of the Bundle) required the applicant to disclose particulars of the clean overdraft, personal loans, credit cards and the amount or credit limit of the credit facilities.  Apart from stating an American Express Gold Card, the Bankrupt did not state any of the information about his loans and other credit cards he held.

27. According to the information obtained by the Trustee, there were substantial omissions of the required credit information in the application form.  The Bankrupt had at that time obtained at least 2 overdraft facilities with Hang Seng Bank and Hong Kong and Shanghai Banking Corporation and over 10 other credit cards.

28. In the 4^th Affirmation of the Trustee, he also raised an additional point that when the Bankrupt stated in the application form that his current home address at the Winsome Property, he further stated that he lived there for one year and it was a rented property at the monthly rental of $27,000.  The Trustee asserted that such information is obviously untrue since the Winsome Property was not rented by the Bankrupt at the monthly sum of $27,000 but was owned by the Bankrupt with a monthly mortgage payment of $42,000.

29. It is the Trustee’s case that the Bankrupt may have intended to misrepresent his financial position when he applied for the credit card with Wing Hang or at the very least, was extremely negligent or reckless when he made the representations.  Ms. Ng for the Trustee submitted that if the Bankrupt disclosed all his indebtedness, credit cards information and the true status of his residential address, Wing Hang might not issue the credit card to the Bankrupt or even if one were issued, it would have a lower credit limit.

30. The Bankrupt admitted that he did not provide all information required and he could not recall the circumstances in which he completed and submitted the application form.  He repeatedly maintained that he had no intention to defraud or misrepresent the bank when he applied for the credit card.

31. In his affirmations and written submission, the Bankrupt tried to put up the following explanations: -

(a)	the relevant officer did not rely on the information in order to decided whether they will offer him the credit card. They are not really interested to know as it may affect their business volume;
(b)	the bank was only interested in his monthly income, tax return, his profession and address proof;
(c)	the space provided for “credit and bank facilities reference” section is too small to accommodate any proper information and therefore, it is easy to mislead people into thinking that those items are of no significance;
(d)	the font size of the notice on the application form and the declaration is too small and it was very difficult to read and was easy to be overlooked;
(e)	the bank staff owed a duty of care to check the reasonableness of the information provided otherwise they would be negligent;
(f)	the staff should do something in order to avoid misunderstanding or misrepresentation and if they did not do it, there is a strong indication that they did not care or did not rely on the information;
(g)	the bank should not leave the application form to their customers to interpret or understand on their own, especially if there will be very serious legal consequences to follow.  They should have the duty to explain the terms to the other party especially the other party is not legally represented;
(h)	the bank should explain and request their customers to fill in the missing parts and also remind or caution them the importance of full disclosure of all their credit or bank facilities information;
(i)	it is unreasonable for the bank to believe that a person like him with such level of income does not have more than 1 credit card, mortgage or credit facility and the staff should enquire about that.  The Bankrupt suggested that a person from the general public like him would have at least 10 to 20 credit cards;
(j)	it will be wholly unfair to him if he was the only one to blame.  The bank should also bear some responsibilities or duties because they had not equipped themselves with a sound or proper system to run their business; and
(k)	he did not regard himself as the legal owner of the Winsome Property not until August 2001 when the Assignment was signed and therefore he indicated in the application form that he rented the Winsome Property and he thought choosing the box “Rental” in the application form was the appropriate one and the amount of $27,000 was the market rent at that time.  Eventually, at the last hearing, he accepted that it was his mistake to put down “rental” instead of “mortgaged”.

The Law

32. I have set out the rationale behind the automatic discharge of bankruptcy and the objection against it under the Ordinance in various of my previous Judgments (see Re Yeung Kwok Lai [2003] 2HKLRD 45 paras. 24 to 26; Re Li Chiu Fun HCB 917/1999 and Re Tang Yu Hong, Eric HCB72/1999).  While the said cases touch on post-bankruptcy conducts, I have examined the case law on pre-bankruptcy conduct, being subject matter of this case, in a more recent Judgment of mine in Re Kwan Kwong Ning HCB17846/2002, 20August 2007 whereby I applied the legal principles as held by Deputy Judge To in Fred Lee v. Tong Yuk Kin (HCB 22870/2002, unreported, 20 June 2007).  I do not repeat the same here.  Both Ms. Ng for the Trustee and the Bankrupt referred extensively in their written submissions the principles enunciated in the said Tong Yuk Kin case.  In deciding this case, I bear in mind all the legal principles set out in the above cases.

33. Since writing this decision, Mr. Justice Lam has handed down his decision in Fred Lee v. Liu Man Hoo (HCB 11719/2002, unreported, 14 September 2007).  Lam J. adopted more or less the same test as decided by Deputy Judge To in the Tong Yuk Kin case for deciding what amounts to unsatisfactory pre-bankruptcy conducts.  In any event, each case has to be decided according to its own peculiar facts.

Discussion and Findings

34. Despite some concessions made during the course of the hearing, the Bankrupt opposed the application quite strenuously and maintained that his pre-bankruptcy conducts as complained by the Trustee were not unsatisfactory.

35. The Bankrupt is an educated man and teaches computer science at the university. Unlike an ordinary person, he should be good at mathematics and calculation and he should know quite well his earning ability.  It appears that his main income should come from his teaching job though he once mentioned about the rental income from his properties.  He did not disclose any documents like tax returns or rental receipts to show the amount that he might have received from such rental income.

36. Regarding the time when the Winsome Property was purchased, there was initially confusion on part of the Trustee.  It was quite clear by now that the purchase was made in March 1996 and possession of the Winsome Property had been delivered to the Bankrupt later in the same month.  Because of the financial problem of the Bankrupt, the completion was delayed until August 2001.  By then, the Bankrupt had to repay $113,598 monthly for his loans; $42,000 for his loan raised on the purchase of the Winsome Property plus other undisclosed sums for payment of the mortgages of his Hong Kong and overseas properties.  Bearing in mind that he was then earning a monthly sum of about $113,000, it is clearly beyond his means to maintain such level of repayment.

37. While the Bankrupt argued that he was only entering into a debt-restructuring scheme when he entered into the mortgage with Post East Finance in August 2001 concerning the Winsome Property, I do not accept that in reality, it was a debt-restructuring scheme at all.  By then, the Bankrupt faced an option: either he was required by the developer to complete the purchase of the Winsome Property by signing the Assignment and Mortgage or he would face legal action taken by the developer for recovery of possession and the outstanding loan immediately.

38. The Bankrupt must be aware of his financial problem well before August 2001.  He faced with a Judgment obtained by the Bank of China in January 2001 for the sum of about $2.4 million which he could make no payment at all.  At that stage, the Bankrupt should know that he was insolvent.  In fact, the Bankrupt admitted in the course of the hearing that he was first aware of his financial difficulty when he asked the developer to reduce the monthly instalments for the Winsome Property in January 1999.

39. In the circumstances, the Bankrupt should not in August 2001 continued to contract debt with the Post East Finance for more than $7 million in order to complete the purchase of the Winsome Property.  Such conduct is in my view irresponsible and unsatisfactory.

40. On the other hand, the Bankrupt argued that his large portfolio of real properties both local and overseas is kept for investment but not speculation.  He produced during the hearing a calculation for the down payments for purchase of all such properties.  For local properties, he was required to pay 10% down payments while the overseas properties would require 20%.  He came up with a figure of HK$7.7 million as down payments.  He said that it was well within his means to pay for such down payments.

41. Though the Bankrupt might only need to pay down payments initially for the purchase of the properties, he forgot that by then, he had contracted debts of over $43 million which he had to repay monthly or at some times in the future.  Further, it can be seen from the evidence of the Bankrupt that for the purchase of the Winsome Property, he used his credit card to pay for the down payment.  Thus, he was just using other credit facilities to cover the down payment and incurred additional debt.

42. From his real properties investment, he had eventually incurred about $19 million proveable debts from his mortgagees which formed a major part of his indebtedness (about 68%).

43. Lam J. had mentioned in paragraph 50 of his recent decision in Liu Man Hoo (op.cit.) that “one should not be too ready in condemning debts incurred for speculation.  In this society, speculation and investment could be a find distinction in many cases.  In some instances, the assumption of high risk on part of a bankrupt is actually fostered by the staff and the sales tactics of the institutional lenders who should have managed their credit risk better.”  However, we have to judge the magnitude of the transactions and activities involved.  Losing money through purchase of the matrimonial home for self use would of course be more ready to be forgived (an example can be seen in the recent case of Master Levy in Re Wong Chi Wai Sunmy, HCB 12941/2002, 28 September 2007).

44. To hold 1 or 2 properties for self use or for investment would be acceptable nowadays in this society.  In this case, the Bankrupt had lost his money and incurred substantial debts through investing into a total of 24 properties.  Even taking into account that at the material time he was earning an average monthly income of about $116,000, it is clearly beyond his need and mean.  I do not see that it is reasonable for him to engage in such activities which incurred substantial loss to his creditors eventually.  I find that such conduct was unsatisfactory.

45. Turning to the misrepresentation ground, the Bankrupt admitted that he failed to fill into the application form all the necessary information.  He asserted that he had no intention to defraud or misrepresent Wing Hang.  The Trustee had not adduced any direct evidence to contradict the Bankrupt’s assertion save the copy Affidavit of Mr. Constable filed in another proceedings.  I have already commented on such copy Affidavit in the Kwan Kwong Ning case (op. cit.) (paragraphs 32 to 34) and I rejected such evidence.  Similar view was taken by Lam J. in the Liu Man Hoo case (see paragraph 58).  I see no reason why the Trustee keeps on placing this copy Affidavit before the court in other similar cases.

46. Despite the fact that the Bankrupt admitted his fault in not giving all the information as required in the application form, as set out in paragraph 31 above, he found all kinds of excuses to shift all or at least part of the blame onto the bank.  I find them unconvincing and I am not prepared to accept.  The Bankrupt is a well educated adult with a respectable job.  He should be responsible for what he had done or omitted to be done.  The bank owed no duty to explain to him the contents of the application form nor assist him to fill in the form.  It is rather his duty to give full information as required by the form so as to facilitate the bank to evaluate his application.

47. His explanation in filling the box “rental” to describe the Winsome Property in the application form is equally unconvincing.  It is plainly untrue.  Instead of putting the amount of $42,000 being the monthly mortgage sum, he deliberately filled in an invented figure of $27,000 which he thought to be the fair market rent of the premises.  Apparently, the Bankrupt had through a mental process selected a figure which would appear to the bank reasonable on face of it so as to persuade the bank to accept his application.  I agree with Ms. Ng that the Bankrupt had made misrepresentations in the application form in order to induce the bank to issue the credit card to him.  With all the information of his indebtedness, credit cards information and the true status of his residential address, I doubt if Wing Hang would issue him the credit card and even if so, whether it would have the same credit limit.  I also find that the Trustee succeeded in this complaint.

48. Having regard to my above findings, I conclude that the Bankrupt’s pre-bankruptcy conducts were unsatisfactory.

Exercise of Discretion

49. After finding that the pre-bankruptcy conducts of the Bankrupt were unsatisfactory, I then have to consider whether in proper exercise of my discretion I should suspend the automatic discharge of the bankruptcy of the Bankrupt and if so, what is the appropriate period.

50. In proper exercise of the discretion, I am guided by the principles decided in the previous cases in particular paragraphs 21 and 22 of the Judgment of Deputy Judge To in the Tong Yuk Kin case (op. cit.).  At the same time,  I also take into account the following observations of Lam J. in his recent case of Liu Man Hoo:

“	65.	In my judgment, the court must take an overall view of the matter in the exercise of discretion.  Whilst there are cases where the unsatisfactory pre-bankruptcy conducts were so serious that it would be difficult for a bankrupt to escape suspension altogether (see Para.17.42 of the Law Reform Commission Report), I am of the view that this case does not fall within such category.
	66.	Whilst I acknowledge that it is important to prevent the abuse of our bankruptcy regime, it has to be remembered that suspension of automatic discharge should be the exception rather than the norm.  If the court is satisfied that the return of the bankrupt to the commercial world in full freedom does not involve an unacceptable risk to persons likely to be engaged in commercial relations with him in the future, it should be slow to invoke the power of suspension.  An over-zealous and widespread use of the power of suspension would not be conducive to the rehabilitation objective of the bankruptcy law.  A bankrupt might feel so discouraged that he simply had no incentive to co-operate and make meaningful efforts to be productive to generate contribution to his estate during the post-bankruptcy period.”

51. In order to have a balanced view in proper exercise of my discretion, I have taken into account that there is no complaint by the Trustee of the Bankrupt’s conducts after the commencement of his bankruptcy.  The Bankrupt had made regular contributions to his estate.  According to the 1^st Affirmation of the Trustee, the Bankrupt had contributed a total sum of about $700,000.  I also take into account the following mitigating factors submitted by the Bankrupt:-

(a)	he has no intention to defraud the creditors;
(b)	he has tried his best to restructure his debts and repay his creditors both prior to and after the bankruptcy order was made;
(c)	his career development may be hindered by his bankruptcy;
(d)	he has to support his wife, his son of the age of 14 and his aged mother who has suffered a stroke;
(e)	the recent death of his father; and
(f)	his last minute concessions made at the hearing.

52. On the other hand, I must say that viewing objectively, his pre-bankruptcy unsatisfactory conducts are rather serious.  The Bankrupt showed no particular remorse for what he had done in the past in causing loss to his mortgagee banks and other financial institutions.  He shifted blame to Wing Hang in his application for credit card.  Allowing him to return to the commercial world without sufficient warning to him would definitely pose an unacceptable risk to those who are likely to be engaged in commercial relations with him in the future.  In this case, I am afraid that the Bankrupt would not expect the same sympathy that I gave in the Kwan Kwong Ning case and his automatic discharge of bankruptcy should be suspended.

53. As for the appropriate period of suspension, I bear in mind the overriding policy of the law is rehabilitation and the purpose is to mark the society’s disapproval of the unsatisfactory conducts in question.  The period should reflect the seriousness.  In this case, the conducts in question are more serious than that in the Tong Yuk Yin case.  Taking all matters into account, in my judgment, a period of 9 months is appropriate.

Conclusion

54. For reasons mentioned above, I order that the relevant period under the Ordinance do cease to run for a period of 9 months from 14 January 2007.  There be no order as to costs of this application.