RE CHOI LAI MING

HCB 4390/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 4390 OF 2002

____________

____________

_______________

J U D G M E N T

_______________

Introduction

1.  The applications now before me raise questions as to the extent of the Hong Kong Government (“the Government”)’s rights in relation to the recovery by it of a loan advanced to a civil servant under the Government’s Home Financing Scheme (“the Scheme”), by which it provided a form of housing benefit to eligible civil servants, in circumstances where the civil servant has subsequently been made bankrupt.

2.  In this case, the civil servant involved is Mr Choi Lai Ming (“Mr Choi”), who is employed as a Senior Waterworks Inspector for the Water Supplies Department.  However, with the exception of an application by the Official Receiver, Mr Choi’s trustee in bankruptcy, for an income payments order against Mr Choi, the questions raised by these applications are of wider significance, as they arise in a large number of bankruptcies involving civil servants to whom loans were made under the Scheme.

The parties’ respective positions

3.  The Government’s primary contention is that it is a secured creditor of Mr Choi in respect of the loan granted to him under the Scheme holding security, holding security in the form of a charge over Mr Choi’s salary, and that as the holder of such security, it is entitled, notwithstanding Mr Choi’s bankruptcy, to continue to make deductions from his salary in order to effect repayments by him of that loan and interest accruing upon it, until the loan and accrued interest are fully repaid.  The Government also contends that it holds similar security over any pension that may be payable by it to Mr Choi.

4.  As a fall back position, the Government says that, even if it is not a secured creditor of Mr Choi’s, it is entitled to make deductions from his salary and any other payments that may be due from it to him by way of set off, so as to effect repayments of the loan, until such time as Mr Choi obtains his discharge from bankruptcy.

5.  The Official Receiver, as Mr Choi’s trustee in bankruptcy, takes the position that the Government is neither a secured creditor nor entitled to exercise any rights of set off against Mr Choi after he became bankrupt, with the consequence that the Government was not entitled to make the deductions which it continued to make from Mr Choi’s salary after his bankruptcy by way of repayment of the loan under the Scheme.  The Official Receiver seeks to recover for Mr Choi’s estate in bankruptcy the deductions which have been so made, and going forward, also applies for an income payments order against Mr Choi under section 43E of the Bankruptcy Ordinance (Cap. 6) (“the Ordinance”) seeking a monthly payment from Mr Choi which is calculated without reference to the deductions which the Government claims to be entitled to make.  The Official Receiver also contends, as a preliminary matter, that the Government is not in fact a creditor of Mr Choi at all, and so has no locus standi to apply for the relief which it seeks.

6.  At the hearing before me, the Government was represented by Mr John Griffiths S.C. and the Official Receiver by Ms Linda Chan.  Mr Choi appeared in person, but restricted his submissions to the income payments order, in relation to which he submitted that if such an order were to be made at all, it should be in a lesser sum than that sought by the Official Receiver, to take account (in particular) of what Mr Choi said were his obligations to support his wife, from whom he was separated, and to support his elderly mother.

The applications under consideration

7.  The applications before me consisted of an amended Summons issued by the Government in the bankruptcy, pursuant to section 97 of the Ordinance, issued on 4 May 2004 and amended on 13 September 2004, and the applications made by the Official Receiver under his report dated 20 July 2004 and under his Notice of Application for an Income Payments Order dated 30 September 2004.

8.  By the amended Summons, the Government seeks:-

(1)     a declaration that it is a secured creditor of Mr Choi and has security rights over any salary, pension and any sums of money whatsoever due from the Government to Mr Choi or his estate in the event of his death; or alternatively

(2)     a declaration that, Mr Choi being indebted to it, the Government is entitled, so long as Mr Choi has not been discharged from bankruptcy, to deduct by way of set off such sums as it may in its discretion determine from any amounts due to Mr Choi (or to his estate in the event of his death) from the Government, by way or salary or otherwise.

9.  By his report dated 20 July 2004, the Official Receiver seeks:-

(1)     an order that the Goverment should pay to the Official Receiver all sums deducted from Mr Choi’s salary from 1 June 2002 onwards; and

(2)     a declaration that the Government is not entitled to make deductions from Mr Choi’s monthly salary for the purpose of repaying the loan made by the Government to Mr Choi under the Scheme, or for the purpose of repaying any other sums that might be due from Mr Choi to the Government or the Financial Secretary Incorporated (“the FSI”).

10.  By the Notice of Application dated 30 September 2004, the Official Receiver seeks:-

(1)     an income payments order requiring the Government to pay to the Official Receiver for the benefit of Mr Choi’s creditors a sum of HK$11,713 per month out of the salary payable by it to Mr Choi; and

(2)     an order in similar terms to the first order sought under the report of 20 July 2004.

The factual background

11.  The factual background to the various applications now before me is set out in the affirmations of Lo Wai Man, a Senior Accounting Officer with the Treasury, and in the reports of the Official Receiver.  This background can be summarised as follows.

12.  So far as the Scheme is concerned, it is a form of housing benefit offered by the Government to eligible civil servants to enable them to purchase property for their residential accommodation.  One form of benefit offered under the Scheme is a downpayment loan, usually limited to 30% of the cost of the property being purchased or 2 years’ salary of the borrower.  Where a borrower has joined the Government’s New Pension Scheme, and has completed 10 years’ pensionable service, he may borrow up to the amount of his earned maximum commuted pension gratuity at the time of application for the loan.

13.  It is well known that banks in Hong Kong are, in general, prepared to finance up to 70% of the cost of residential properties by way of mortgage.  Thus, the downpayment loans under the Scheme provide a means by which civil servants are enabled to borrow up to the whole of the downpayment which they would otherwise have to fund from their own savings or other resources, and thus to own residential accommodation which they might otherwise find difficult to acquire.

14.  Such loans are repayable by equal monthly instalments of principal and interest over a period of 10 years (or a shorter period up to the civil servant’s retirement age, if earlier).  Where a civil servant applies for such a loan within 10 years before his retirement, he may elect to make monthly repayments of interest only, repaying the principal amount of the loan from his commuted pension gratuity.

15.  These terms, and terms setting out the mechanisms by which repayments are to be effected, are embodied in a number of documents executed by the civil servant in the process of applying for and obtaining the loan, and in applicable Civil Service Regulations (“CSRs”) which form part of the loan terms (being incorporated by reference), and which are also part of the terms of employment of the civil servant.  I shall refer to the relevant provisions in these documents and the CSRs below.

16.  Mr Choi joined the civil service on 22 September 1980, and attained his current grade on 3 August 1982.  His terms of employment provide that he agrees to be bound by all Government Regulations, including CSRs.

17.  Mr Choi first joined the Scheme on 3 January 1997, and was granted a downpayment loan for the purchase of a property at 8 Honiton Road, Hong Kong.  He borrowed some 70% of the cost of the property from a commercial bank, which obtained a first legal charge over the property.  The property was also subject to a second legal charge in favour of the FSI as security for the downpayment loan.

18.  In 1999, Mr Choi decided to purchase a different property, at Flat F, 11^th floor, Block 6, Tung Chung Crescent, Tung Chung, Lantau.  On 20 July 1999, he made an Initial Application for change of property.  On 21 July 1999, he completed a Formal Application for a downpayment loan in respect of the new property in the amount of HK$776,400, this being 30% of the purchase price of HK$2,588,000.  On 27 July 1999, he was informed by the Director of Accounting Services (“the DAS”) that the proposed change of property had been approved in principle under CSRs 1600-1799 governing the Scheme.

The relevant documents and their terms

19.  The Formal Application was addressed to the DAS.  Clauses 4 and 5 of the Formal Application provided, so far as material, as follows:-

“4.     ... I agree that DAS shall have the right to recover any loans from my salary or any monies due for whatever reason to me or to my estate from the Government.

5.      I agree to abide by the provisions of the [Scheme] set out in [CSRs] 1600-1799 and any subsequent amendments thereof.  I undertake to execute a legal charge against the property in favour of the [FSI] in the prepared format at my expenses for the Loan to be granted to me.”

32.  Against this background, the following issues arise for consideration in relation to the various applications which are before me:-

(1)     First, does the Government have locus standi to make its application?  This question arises because the Official Receiver has expressed doubts as to whether the Government is in fact a creditor of Mr Choi, or whether the creditor is in fact the FSI (as stated in the proof of debt and the second legal charge).  If the creditor is in fact the FSI, then the Government would not appear to have any sufficient interest to enable it to seek the declarations which it does.

(2)     If the Government is in fact Mr Choi’s creditor, is it a secured creditor of Mr Choi, with security over any of the following: his salary, his pension and other payments due by it to him?

(3)     Even if the Government is not a secured creditor of Mr Choi, is it entitled to set off sums due from him against payments which it might have to make to him, so long as he has not been discharged from his bankruptcy?

(4)     In the course of argument before me, the following issues were also canvassed:-

(a)    What effect will Mr Choi’s discharge from bankruptcy have on the Government’s rights against him, assuming it to be (i) a secured creditor; and (ii) an unsecured creditor of his?

(b)   Is the Government entitled to continue to charge interest on the downpayment loan as against Mr Choi, notwithstanding his bankruptcy?

(5)     In the light of my conclusions on the foregoing questions, should an income payments order should be made against Mr Choi, and if so, in what amount?

Is the Government a creditor of Mr Choi?

33.  I consider first the question of whether the Government is in fact a creditor of Mr Choi.  As to this, Ms Chan points to the following matters to suggest that the Government is not Mr Choi’s creditor:-

(1)     The proof of debt, which was submitted by the FSI and described the FSI (a separate entity from the Government) as Mr Choi’s creditor;

(2)     The second legal charge, which describes the FSI as “the Lender”;

(3)     The fact that the surplus proceeds on the sale of the property by the first mortgagee were paid to the FSI.

34.  Against this, however, must be set the following:-

(1)     The Formal Application was made to the DAS, who is an officer of the Government, and not of the FSI;

(2)     The Agreement Form for Repayment of Downpayment Loan was expressed to embody an agreement between the Government and Mr Choi.

(3)     That form referred, in Clause 1, to the consideration for the agreement being the Government’s agreement to make an advance to Mr Choi.

(4)     CSR 1656(c), which required the second legal charge to be prepared in favour of the FSI on the instructions of the DAS.

(5)     The letters of instruction in relation to the preparation of each of the second legal charges over the property referred to the Government (and not the FSI) as having agreed to the discharge of the then existing second legal charge over (initially the old, and later the new) property.

35.  I think it is also right to have regard to Mr Ho’s evidence as to the position of the FSI as the agent of the Government, and not as the lender in its own right.  To the extent that this evidence was challenged, it was not by way of cross-examination of Mr Ho, but by way of reference to the matters referred to in paragraph 33 above.

36.  While it is fair to say that the documentation is somewhat inconsistent, it seems to me that the key documents are those by which the loan was brought into existence.  These are, in my view, the Formal Application and the Agreement Form for Repayment of Downpayment Loan.  Both of these documents make it clear that the lender of the loan is the Government.  It is the party which agrees to make the loan available to Mr Choi.  The latter document also stipulates for the provision of security over the property by way of a second legal charge, which in the event was granted to the FSI.  It seems to me that the fact that such security was held by the FSI (essentially at the instructions of the Government, since it was the Government who stipulated for the security) should be regarded as indicating no more than that the FSI, in holding such security did so as agent for the Government.

37.  It is true that the FSI described itself as the creditor in the proof of debt, and did not state itself to be the Government’s agent in submitting the proof of debt.  However, that is a matter that can be put right by a suitable amendment to the proof of debt, to enable the FSI to state the capacity in which it lodged such proof, should that be necessary.  I can see no prejudice to Mr Choi or his bankruptcy if such an amendment were to be made, particularly since the proof in its present form is in any case defective (in failing to value the security which is said to be held for the debt), and has not been dealt with by the Official Receiver to date.  That said, however, in the course of the hearing before me, Mr Griffiths indicated that if the Government were found to be a secured creditor as it claims to be, it would seek to withdraw the proof and would elect to stand on its security.  If it does so, the question of amendment to the proof of debt will become academic.

38.  I do not regard the fact that payment of the surplus sale proceeds of the property were paid to the FSI as being particularly persuasive evidence indicating that the FSI and not the Government was Mr Choi’s creditor.  At best, that fact is equivocal, as it would be equally consistent with the FSI having received such monies as the agent of the Government.

39.  For the reasons explained above, I am satisfied that it is more probable than not that the Government, rather than the FSI, is the creditor of Mr Choi in relation to the downpayment loan made to him.  It therefore follows that the Government has the necessary standing to seek the declarations which it does.

Is the Government a secured creditor of Mr Choi?

40.  I consider next whether the Government is a secured creditor of Mr Choi, holding security over his salary, pension and other payments which might be due from the Government to him.

Salary

41.  I shall deal first with the position in relation to salary.

42.  Ms Chan, for the Official Receiver, referred me to the description of a security interest by Professor Goode, in Legal Problems of Credit and Security (3^rd ed) at para 1-16:-

“A security interest is a right given to one party in the asset of another party to secure payment or performance by that other party or by a third party.  A fixed, or specific, consensual security interest possesses the following characteristics:-

(1)     It is a right given by a debtor to a creditor in an asset;

(2)     The right is by way or grant of an interest in the debtor’s asset, not by way of reservation of title to the creditor;

(3)     The right is given for the purposes of securing an obligation;

(4)     The asset is given in security only, not by way of outright transfer;

(5)     The agreement restricts the debtor’s right to dispose of the asset free from the security interest.”

43.  She further submitted that in determining whether or not “the right is given for the purpose of securing an obligation” so as to ascertain the true nature of the right created by the parties, the Court’s approach was as stated by Lord Millett in Agnew v Inland Revenue Commissioner [2001] AC 710 at 725-726, where he said:-

“In deciding whether a charge is a fixed charge or a floating charge, the court is engaged in a two-stage process.  At the first stage, it must construe the instrument of charge and seek to gather the intention of the parties from the language they have used.  But the object at this stage of the process is not to discover whether the parties intended to create a fixed or floating charge.  It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets.  Once these have been ascertained, the court can then embark on the second stage of the process, which is one of categorisation.  This is a matter of law.  It does not depend on the intention of the parties.  If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it ...”

44.  Mr Griffiths took issue with this approach.  He pointed out that the decision in Agnew was concerned with the question of whether a charge that had been given was fixed or floating.  The question of whether or not there was a charge at all was not in issue.  He submitted that the better approach was to consider whether or not the intention of the parties was to confer on the creditor a security interest in the debtor’s property.  Such intention, he submitted, could be gathered not just from the language used, but also from the surrounding circumstances, relying on the observations of Buckley LJ in Swiss Bank Corporation v Lloyds Bank [1982] AC 582 at 595:-

“... whether a particular transaction gives rise to an equitable interest ... must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances.  The intention may be expressed or it may be inferred ... notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the documents in the light of any admissible evidence as to the surrounding circumstances the parties have entered into ... an equitable charge ... the fact that they may not have realised this consequence will not mean that there is no charge.  They must be presumed to intend the consequences of their acts.”

45.  While it is true that Agnew’s case was concerned with the classification of a charge as either fixed or floating, it seems to me that there is not a significant difference between the two approaches contended for.  On either approach, what is necessary is to seek to ascertain the intention of the parties as to their respective rights and obligations from the document(s) and admissible surrounding circumstances.  Having ascertained what those rights and obligations were intended to be, the legal effect will be a matter for the courts, so that how the parties have described the arrangement will not be conclusive if that description is inconsistent with the legal effect of what they have done.

46.  In this case, so far as salary is concerned, the most relevant provisions are, to my mind, Clauses 4 and 5 of the Formal Application (the latter of which brings in the CSRs), Clause 1(d)(ii) of the Agreement Form for Repayment of Downpayment Loan, and CSRs 1670(a), 1673(b) and 1741(b).  The effect of these provisions (in particular CSR 1670(a)) is that it was expressly agreed between Mr Choi and the Government that payment of the instalments by which the downpayment loan and interest on it was to be repaid would be effected by deduction from his monthly salary.  This therefore authorised the Government to repay itself out of Mr Choi’s salary.  The authority to do so was, moreover, irrevocable, since Mr Choi could not revoke it without being in breach of his agreement.  The authority was also, I think, irrevocable, in that being embodied in the CSRs, it could only be changed by the Government, and not by Mr Choi.

47.  That situation appears to me to be indistinguishable from the situation which obtained in King v Michael Faraday and Partners Limited [1939] 2 KB 753, where a irrevocable direction by an employee to his employers that they should make certain payments out of his salary to a creditor of his was regarded as imposing a charge on the employee’s salary in favour of the creditor (which charge had been lost for other reasons).  Unless there is some compelling reason for concluding that no charge over salary can have arisen, I would conclude that such a charge was created by the provisions to which I have referred.

48.  Ms Chan submitted that the provisions relied upon by the Government did not give rise to an equitable charge over Mr Choi’s future salary.  As I understood her, the principal bases for this submission were:-

(1)     Each of the provisions relied upon were by their nature only personal agreements given by Mr Choi to repay the loan, and could go no further than providing the Government with a right of set off, but not security.

(2)     The right of deductions from salary were not given for the purpose of securing any obligation, no asset being given to the Government by way of security, there being no provision to that effect.

(3)     The absence of any equity of redemption on Mr Choi’s part, in respect of his future salary, was also indicative that no security interest was intended to be granted (reliance was placed on Kent v Sussex Sawmills Limited [1947] Ch 177 for this proposition).

(4)     No equitable charge could, as a matter of principle, be created over future salary, because:-

(a)    the employment contract between Mr Choi and the Government was not one of which specific performance would be decreed, it being essential for a charge that the court would decree specific performance of the contract (a proposition said to be established by Holroyd v Marshall (1862) 10 HL Cas 191); and

(b)   the employment contract, and thus the entitlement of Mr Choi to be paid his salary is subject to a contingency in that Mr Choi has to continue with his employment and the existence of such a contingency was inconsistent with there being a charge (reliance was placed on Holroyd v Marshall for this proposition, and on the views of Professor Goode at para 2-15 of Legal Problems of Credit and Security).

49.  As to these arguments, I do not think that the first point taken is a good one.  For the reasons which I have already endeavoured to explain, I am of the view that the provisions in question go beyond a mere undertaking or agreement on the part of Mr Choi to repay the downpayment loan advanced to him, and extend to giving the Government a right to satisfy itself out of Mr Choi’s salary which might become due to him from the Government from time to time.

50.  Similarly, it seems to me to be clear that the purpose of the provisions was to enable the Government to have a measure of security for the obligations of Mr Choi in respect of the downpayment loan.  The whole purpose of CSR 1670(a) is to ensure that the Government is able to recoup itself for the monthly repayment instalments that would become due.  While it is fair to say that the language of the provisions is not expressed in terms of the creation of a charge over Mr Choi’s salary in favour of the Government, it should also be borne in mind that it is not necessary, I think, for the precise words to be used as long as the effect of what is agreed gives rise to a charge as a matter of legal effect.

51.  As to the supposed absence of any equity of redemption, it seems to me that this is implicit in the fact that the Government is only entitled to make deductions from Mr Choi’s salary so long as there is something owing from him to it.  Once the downpayment loan is fully repaid, the Government will no longer have any entitlement to make deductions from Mr Choi’s salary in respect of it, and should it do so, will clearly be bound to repay any over-deduction to Mr Choi.

52.  Although it is true that in Holroyd v Marshall, there were references to the need for the agreement giving rise to the equitable charge to be specifically enforceable, I do not see that there is any problem in this case.  Assuming this to be correct, it seems to me that the relevant agreement is that which gives rise to the charge, not that which gives rise (or may give rise) to the property which is to be charged.  It is of course true that Mr Choi’s employment contract is not one which is specifically enforceable.  But that is not, in my view, the relevant contract.  The relevant contract is the agreement that the Government should be entitled to have recourse to his salary (if earned) in order to repay itself in respect of the downpayment loan.  I see no reason for thinking that that agreement would not be susceptible to being ordered to be specifically performed, if necessary.

53.  Finally, so far as the question of the contingency that Mr Choi might not earn any salary in future if he ceased to be employed is concerned, I do not see that this is a problem in this case either.  The relevant passage in Professor Goode’s book reads:-

“An agreement for a mortgage or charge is treated in equity as a security interest only if it is not subject to any contingency other than the debtor’s acquisition of an interest in the asset.  An agreement to give security on any other contingency, whether the contingency be a demand by the creditor to do so, default by the debtor or the occurrence of some other uncertain event, is a mere contract, not an equitable charge.”

54.  Here, the only contingency would be whether or not Mr Choi would acquire an interest in the relevant asset - his right to be paid salary.

55.  Ms Chan also suggested that an assignment of future salary might not be enforceable against a trustee in bankruptcy.  As I understood it, this proposition was based on Ex parte Nichols (1883) 22 Ch D 782 and Re de Marney [1943] 1 Ch 126.  However, so far as the former case is concerned, it seems clear that the decision was based on the court’s view that the earnings in that case which were said to have been charged to a credit were not the personal earnings of the debtor, but earnings from his business.  As the debtor’s business was an asset which vested in the trustee, any carrying on of that business after the bankruptcy was to be regarded as having been done by (or on behalf of the trustee), so that any income arising from it was the income of the trustee, which could not be affected by an antecedent agreement between the debtor and his creditor.  The same situation arose in Wilmot v Alton [1897] 1 QB 17, where the same approach was taken.  Where the income is that of the debtor himself, in my view there is nothing that prevents that income from being assigned or charged in such a way as to be binding in the event of a subsequent bankruptcy (see King v Michael Faraday, supra).  Although it does appear that a different conclusion was reached in Re de Marney, it is difficult to discern the basis of the decision from the short judgment given, and I prefer the reasoning in King v Michael Faraday.

56.  Moreover, it is clear from section 43 of the Ordinance that the estate of a bankrupt comprises his property at the time when the bankruptcy commences (i.e. on the making of the bankruptcy order).  Although it is possible for a trustee to claim after acquired property for the bankrupt’s estate under section 43A of the Ordinance, this does not extend to the bankrupt’s income (see section 43A(5)), which, if it is to be claimed, must be made the subject of an income payments order under section 43E.  This means that the bankrupt’s income is not automatically part of his estate, although there may be circumstances in which part of that income may be ordered to be paid into his estate for the benefit of his creditors.  In these circumstances, I do not see any insuperable objection in principle to an agreement being made, prior to bankruptcy, which has the effect of charging that income or part of it to a creditor.

57.  I am therefore of the view that the Government is a secured creditor of Mr Choi, with security over his monthly salary.  It seems to me that all of the elements of a security interest posited by Professor Goode are present in this case.  There is a right given by a debtor (Mr Choi) to a creditor (the Government) in an asset (his future salary, the right to receive which is a form of property, being a future contingent thing in action).  It is given by way of the grant of a security interest (a charge), for the purpose of securing an obligation (the downpayment loan).  It is given in security only, since the right will cease on the loan being repaid), and the debtor (Mr Choi) is not free to dispose of the asset without regard to the security interest.

Pension

58.  So far as Mr Choi’s pension is concerned, it seems to me that the position is, similar.  The question of whether the Government was a secured creditor in respect of Mr Choi’s pension was not the subject of as much argument, perhaps because this was not an asset that could form part of his bankruptcy estate.  However, it seems to me that the provisions of the Formal Application, Agreement Form for Repayment of Downpayment Loan and the relevant CSRs also make it clear that it was intended that the Government should have a security interest in any pension to which Mr Choi might become entitled.  Apart from the provisions which give rise to the Government’s entitlement to have recourse to Mr Choi’s pension, it is to my mind significant that:-

(1)     the amount of the loan which can be made is limited by reference to the maximum commuted pension gratuity at the time of application;

(2)     interest only payments are permissible where the officer in question is due to retire within 10 years of taking out the loan, with repayment of principal to come out of his commuted pension gratuity;

(3)     the Agreement Form provides by clause 1(b) and 2 that Mr Choi is to elect to receive a reduced pension so that the commuted pension gratuity will be sufficient to repay the outstanding loan, and that such election is to be irrevocable so long as any part of the loan remains outstanding.

Each of these provisions indicates the importance of the commuted pension gratuity as a source of repayment of the downpayment loan, and to my mind they are strongly supportive of the Government’s contention that it is secured on Mr Choi’s pension as well.

59.  I am therefore satisfied that the Government is also a secured creditor in relation to Mr Choi’s pension.

60.  Some further support for this conclusion is also to be found in:-

(1)     the paper (FCR(90-91)62) submitted to the Finance Committee of the Legislative Council when the Scheme was being considered (exhibited as exhibit LWM-1 to Mr Lo’s affirmation), in which it is indicated that the Government would seek, as security for loans to be advanced, the second legal charge in addition to the security which it could obtain over the pension of the officer concerned; and

(2)     the fact that given that the downpayment loan would be in relation to the balance of the purchase price of a property, the effect of taking a second legal charge would be that there would be no real security against fluctuations in the property market - in such circumstances, it is perhaps to be expected that the Government as lender would seek to obtain security from other sources as well.

Other payments due from the Government to Mr Choi

61.  So far as other payments which might be due from the Government are concerned, the Government has, in the documents to which I have already referred, stipulated for the right to make deductions from such amounts in the event that it wishes to do so to effect recovery of the downpayment loan.  Again, this stipulation would seem to be effectively irrevocable, and insofar as it is necessary, I would accept that the Government has security over such sums, should they arise in future.

62.  Having regard to the conclusions to which I have come, it is in my view appropriate to make the declaration sought by the Government under paragraph 1 of the Government’s amended Summons.

Set-off

63.  In the light of my conclusion that the Government is a secured creditor of Mr Choi in respect of his salary, pension and other payments that may be due to him, the question of set-off does not need to be determined, and the declaration sought under paragraph (2) of the amended Summons would no longer appear to be required, and I do not propose to comment further on these.

64.  I would, however, deal briefly with the other two points that were canvassed in argument, which I mentioned in paragraph 32(4) above.

What effect will Mr Choi’s discharge have on the Government’s position as a secured creditor?

65.  The first of these points relates to the effect, if any, that Mr Choi’s obtaining his discharge from bankruptcy will have on the debt owed to the Government under the instalment loan.  Ms Chan suggested, on the basis of the decision of the New Zealand Court of Appeal in Perrott v Newton King Ltd [1933] NZLR 1131, that notwithstanding that the Government is (as I have held) a secured creditor, the debt will be discharged.

66.  If by this submission Ms Chan intended to suggest that the effect would be that the Government could no longer enforce its security against Mr Choi after his discharge, I am afraid I do not agree.  I have been unable to find in the report of Perrott the precise terms of the relevant provision of the then New Zealand bankruptcy legislation, and I therefore find that case to be of limited assistance.  In any event, it seems to me that the position as to this point is governed by section 32(3) of the Ordinance.  That section provides:-

“Discharge does not affect the right of any secured creditor of the bankrupt to enforce his security for the payment of a debt from which the bankrupt is released.”

67.  In my view, the clear meaning of that provision is that, notwithstanding that the bankrupt has been released from the debt by reason of his discharge, the secured creditor remains able to enforce his security for the payment of such debt.  That can only mean that the creditor remains able to satisfy himself out of such security.  The consequence is, therefore, that the Government will be entitled to continue to have recourse to Mr Choi’s salary (and, if necessary, pension and other sums due to him from the Government).

Is the Government entitled to post-bankruptcy interest?

68.  As to the other point, Ms Chan submitted that by reason of section 71 of the Ordinance and rule 17 of the Bankruptcy (Proof of Debts) Rules, it was not open to the Government to continue to charge interest on the outstanding downpayment loan after Mr Choi was made bankrupt.  Section 71 provides that interest on a debt is provable as part of the debt except insofar as it is payable in respect of any period after the commencement of the bankruptcy.  In my view, that section has no application to the position of a secured creditor if he does not prove in the bankruptcy.  In that situation, he has no need to prove for the interest on the debt, and can rely on his security to recoup himself both in respect of principal and interest.  This is the position in New Zealand (see Lamont v Bank of New Zealand [1981] NZLR 142), and I am not aware of any contrary authority in Hong Kong.

69.  The only complication here is that the Government has, through the FSI, submitted a proof of debt in Mr Choi’s bankruptcy.  However, as I have already observed, that proof was defective in that it failed to comply with the relevant rule requiring the security to be valued, and the proof has not been dealt with.  In these circumstances, I think that it would be open to the Government to simply withdraw the proof of debt, as Mr Griffiths indicated that it would.  I can see no prejudice to any party if this were to happen, since no steps have been taken in relation to the proof.

The Official Receiver’s applications of 20 July 2004

70.  The consequence of the decisions to which I have come is that neither the order nor the declaration sought by the Official Receiver in his report of 20 July 2004 should be made.  As I have held that the Government was entitled to rely on its security, and thus to make the deductions which it has done from Mr Choi’s salary, there is no basis for ordering it to repay such deductions to Mr Choi’s estate in bankruptcy.  Nor is there any basis for the declaration which is sought.

The application for an Income Payments Order

71.  That leaves the income payments order sought against Mr Choi.  The amount sought to be paid over, out of his income, is HK$11,713 per month.  This was predicated on the basis that the Government is not entitled to deduct HK$9,467.37 per month from such income to repay itself in respect of the downpayment loan as it has been doing so far.  That basis has proven to be unfounded.  At best, therefore, an income payments order in the region of HK$2,300 per month could be justified.

72.  However, as to this, Mr Choi did submit at the hearing that account should be taken of his commitments to provide for his wife and his elderly mother.  Following the hearing, he provided (pursuant to leave which I gave) some evidence to substantiate these commitments, and also explained that his other brothers, who might otherwise be expected to assist in supporting his mother, were in no position to do so because they were either recently discharged or undischarged bankrupts.  The bankruptcies of Mr Choi’s brothers was confirmed by the Official Receiver.

73.  In these circumstances, I am not satisfied that it would be appropriate to make any income payments order against Mr Choi, and decline to do so.

Disposition and Costs

74.  There will therefore be a declaration in terms of paragraph 1 of the Government’s amended Summons.  That apart, I shall make no order in relation to paragraph 2, or in respect of the various applications made by the Official Receiver.

75.  So far as the question of costs is concerned, I was given to understand at the conclusion of the hearing that these had been agreed as between the Government and the Official Receiver.  I shall therefore leave it to the parties to embody that agreement in the order to be submitted to me.  Should there be any dispute or difficulty as to this, they are at liberty to apply in relation to the question of costs.