RE WONG SIU FAI

CACV 247/2007 AND CACV 261/2007

CACV 247/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 247 OF 2007

(ON APPEAL FROM HCB NO. 20722 OF 2002)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

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

Hon Le Pichon JA:

2.  These appeals by the Official Receiver concern the power to ‘backdate’ the discharge of a bankrupt.  At the conclusion of the hearing, the appeals were allowed with written reasons to be handed down, which we now do.

Background

3.  The Official Receiver appealed from orders of Master Au-Yeung (as she then was) dated 5 July 2007 in HCB 20722/2002 and of Madam Registrar Au-Yeung dated 9 August 2007 in HCB 5082/2000 declaring, in each case, that the bankrupt was discharged from his bankruptcy as of an earlier date than the date on which the discharge order was made.

4.  CACV 247 relates to the bankruptcy of Chan Kwok Keung (“Chan”) and CACV 261 relates to the bankruptcy of Wong Siu Fai (“Wong”).  In each case, shortly prior to the expiration of the relevant period (being four years commencing with the date of the bankruptcy), the master made an interim order suspending the automatic discharge of the bankrupt pending the determination of the Official Receiver’s summons under section 30A of the Ordinance objecting to the automatic discharge.

5.  In Chan’s case, in the light of evidence filed by him, the Official Receiver sought to withdraw the application under section 30A.  That application was heard on 15 March 2007, approximately 2½ months after the expiration of the four-year period.  The registrar granted the Official Receiver leave to withdraw, made an order setting aside the interim order for suspension, and ordered that Chan be discharged from bankruptcy not on the day the summons was disposed of but on 2 January 2007, being the end of the four-year period.

6.  On the Official Receiver's application for variation, on 5 July 2007, the registrar substituted an order discharging the interim suspension order in lieu of the order setting it aside, but refused to substitute 15 March 2007 (the date leave was granted for the withdrawal of the section 30A summons) for 2 January 2007.

7.  In Wong’s case, the bankruptcy order was made on 21 March 2001 and the interim order on 16 March 2005 but, for reasons not relevant on this appeal, the adjourned hearing of the section 30A summons when it was finally disposed of did not take place until 1 August 2007.  On 9 August 2007, the registrar made an order declaring the bankrupt discharged from bankruptcy on 21 March 2005, which was almost 2½ years earlier.

These appeals

8.  The sole issue that arises is whether, on the proper construction of section 30A, a court is empowered to ‘backdate’ the discharge of the bankrupt in the sense of declaring that the discharge be of a date earlier than the date the objection summons finally is disposed of by the court.  At the appeal hearing, this court had the assistance of Mr Beresford who represented the Official Receiver and of Ms Cheng who, on the instructions of the Official Receiver, appeared as amicus curiae.  Mr Chan was in person but Mr Wong was absent.

The statutory framework

9.  Section 30A governs a bankrupt’s discharge from bankruptcy.  It comprises 11 subsections.  In pertinent part, section 30A reads as follows:

“ (1) Subject to this section, a bankrupt is discharged from bankruptcy by the expiration of the relevant period under this section.

  (2) The relevant period referred to in subsection (1) is as follows-

    (a)    where a person has not previously been adjudged bankrupt, the period of 4 years;

    (b)    where a person has been previously adjudged bankrupt, the period of 5 years,

beginning with the commencement of the bankruptcy.

  (3) Where the court is satisfied on the application of the trustee or one of the bankrupt's creditors that a valid objection based on one or more of the grounds set out in subsection (4) has been made, the court may order that the relevant period under this section shall cease to run for such period, not exceeding, in the case of a person who-

    (a)    has not previously been adjudged bankrupt, 4 years; or

    (b)    has previously been adjudged bankrupt, 3 years,

as may be specified in the order.

  (4) The grounds on which an objection can be made to the discharge of a bankrupt under this section are …

…

  (6) Where the trustee or a creditor objects to the discharge of a bankrupt, he shall-

    (a)    notify the court; and

    (b)    in the case of a creditor, also notify the trustee,

not less than 14 days before the end of the relevant period under this section, stating the grounds of his objection and applying for an order under subsection (3).

  (7) Where the court has suspended the running of the relevant period under subsection (3), the bankrupt may, at any time, apply to have the suspension lifted and the court may, having regard to the interests of all the parties, lift the suspension or shorten the period during which it will operate.

…

  (10)   Notwithstanding subsections (1) to (3), where a bankrupt-

    (a)    has, before the commencement of the bankruptcy, left Hong Kong and has not returned to Hong Kong, the relevant period under subsection (1) shall not commence to run until such time as he returns to Hong Kong and notifies the trustee of his return;

    (b)    after the commencement of his bankruptcy-

    (i) …

    (ii)    fails to return to Hong Kong on a date or within a period specified by the trustee,

the relevant period under subsection (1) shall not continue to run during the period he is absent from Hong Kong and until he notifies the trustee of his return.

  (11)   This section is without prejudice to any power of the court to annul a bankruptcy order.”

10.  It will be seen from subsection (1) that the right to automatic discharge by the expiration of the “relevant period” defined in subsection (2) is not an absolute right: the four or five-year period under subsections (1) and (2) is “subject to” the provisions of section 30A as a whole.  Of particular relevance are subsections (3) and (10) both of which affect the ‘running’ of the relevant period.  The former empowers the court to postpone the date of automatic discharge if it is satisfied that a valid objection has been made by the trustee or one of the creditors on one or more of the grounds set out in subsection (4), provided that the total period of bankruptcy does not exceed eight years in any given case.  The latter deals with how a period of absence of the bankrupt from Hong Kong would affect the computation of the relevant period.  If applicable, either subsection would have the effect of postponing the discharge date of the bankrupt.

11.  It is an almost invariable consequence of subsection (6) that, normally, objections would only be lodged shortly before the end of the relevant period.  Realistically, they cannot be dealt with substantively before the expiration of the relevant period and, if the evidence before the court justifies it, an interim order would be made to ‘hold the ring’ until the matter could be dealt with substantively.

Interim orders

12.  In the cases under appeal, shortly before the end of the relevant period as defined in subsection (2), the master made an interim order “suspending the automatic discharge of the bankruptcy of the Bankrupt pending the determination of the Summons of the Official Receiver”.  The first matter to consider is the power to make interim orders.

13.  That question was considered by the English Court of Appeal in Bagnall v Official Receiver [2004] 1 WLR 2832 in the context of section 279 of the Insolvency Act 1986 on which section 30A was modelled.  Arden LJ’s analysis appears from the following passage from her judgment:

“   25. … On first reading section 279(3) does not authorise the making of interim orders.  This is because it only applies “if the court is satisfied that a bankrupt has failed or is failing to comply with any of his obligations under this Part”.  Obviously, after a substantive hearing the court must be so satisfied, on the balance of probabilities…  It would be odd, however, if the court could not make an order at any interim stage provided of course that the application was filed within the three-year period, otherwise Parliament’s intention could be rendered futile if the bankrupt concealed his activities until the last moment or managed to gain an adjournment…

    26. There could also be other circumstances in which the evident purpose of section 279 could be frustrated by the absence of a power to make an interim order.  Suppose the official receiver issued and served his application well within the time required but the court declined to make a suspension order; suppose further that the official receiver wishes to appeal that order but before the appeal can be heard the three-year period expires.  If the appeal is ultimately successful the official receiver would be deprived of the fruits of his success if no interim order can be made.  I also bear in mind that section 279(3) does not entail any change in the status of the bankrupt but rather the continuation of a pre-existing status and the postponing of the discharge date.  In all those circumstances I consider that section 279(3) must be read as enabling the court in an appropriate case to make an order at a point in time before the substantive hearing of the application.  The word “satisfied” means, as I see it, “proved sufficiently” and there must, in the particular circumstances, be an iterative process between the proposed order and the degree of satisfaction required.  Accordingly where only an interim order is proposed the degree of satisfaction required is that sufficient to justify the court in granting that interim order.

    27. In this case the judge expressed the position as being that there was a strong prima facie case for the grant of an order under section 279(3).  In my judgment the court has power to make an interim order under this section and in doing it must be satisfied that there are reasonable grounds for concluding that such an order would be made after the substantive hearing on the material then placed before the court…”

14.  Ms Cheng submitted that an alternative source of jurisdiction for the making of interim orders would be the court’s inherent jurisdiction, on the basis that such orders are necessary to prevent applications under section 30A(3) from being inefficacious.  I do not understand Ms Cheng to be saying that the reasoning in Bagnall is wrong.  If so, I fail to see the need to find another source of jurisdiction.  For my part, I consider the reasoning in Bagnall to be impeccable and gratefully adopt it.  Accordingly, I am of the view that section 30A(3) enables the court to make interim orders.

15.  The next matter to consider is the effect of such orders.  It should be stated that these appeals do not concern interim orders that are nullities.  It is not suggested that the interim orders made in the cases with which we are concerned ought not have been granted in the first place, or were improperly obtained.

16.  Mr Beresford submits that once an interim order is made and so long as it is extant, it would operate to suspend the running of the relevant period and so continue the bankrupt’s status as a bankrupt.  Rights and obligations flow from interim orders that are in force since they relate to a person’s status as an undischarged bankrupt .  That status has wide-ranging ramifications.  It is relevant not only to the application of a number of provisions in the Bankruptcy Ordinance such as section 43A (which deals with a bankrupt’s after-acquired property) and Part VIII which deals with bankruptcy offences, but also to provisions in other ordinances such as the Companies Ordinance, Cap. 32 (see, for example, section 156 which prohibits undischarged bankrupts from acting as directors, sections 278 and 297A (which disqualify undischarged bankrupts from being appointed liquidator, receiver or manager), the Legal Practitioners’ Ordinance, Cap. 159 and the Professional Accountants Ordinance, Cap. 50 (which have provisions determining the validity of practising certificates on bankruptcy).  The applicability of those provisions depends on the status of the individual concerned at a particular point in time (whether or not he was an undischarged bankrupt).  Thus the ability to state with certainty whether a person is an undischarged bankrupt at any time is an essential feature of the statutory scheme.

17.  Mr Beresford reasoned that to ‘backdate’ an interim order would be to treat it as if it had never been made when, in reality, rights and obligations do flow from the making of an interim order.  ‘Backdating’ would destroy the cohesiveness and workability of the statutory scheme, he said, because it would introduce uncertainty as regards the application of various provisions.  Mr Beresford proceeded to illustrate the difficulties that would arise if the discharge is of an earlier date than that on which the discharge order was made.

18.  Section 43A provides as follows:

“ (1) Subject to this section, the trustee may by notice in writing claim for the bankrupt's estate any property which has been acquired by, or has devolved upon, the bankrupt since the commencement of the bankruptcy.

  (2) A notice under this section shall not be served in respect of-

    (a)  any property falling within section 43(2) or (3); or

    (b)  any property which is acquired by, or devolves upon, the bankrupt after his discharge.

  (3) Subject to subsection (4), upon the service on the bankrupt of a notice under this section the property to which the notice relates shall vest in the trustee as part of the bankrupt’s estate; and the trustee’s title to that property has relation back to the time at which the property was acquired by, or devolved upon, the bankrupt.”

If property were to devolve on a bankrupt during the currency of an interim order, the trustee may claim that property for the bankrupt’s estate by serving the requisite notice.  The subsequent discharge of the interim order would not alter the legal effect of what has taken place pursuant to section 43A.  If, on the other hand, the date of a bankrupt’s discharge could be backdated, it would create a great deal of uncertainty.  For example, would it mean that what then was a perfectly legitimate exercise of the trustee’s powers would become invalid?  To whom would the property belong? Would it have to be repaid?

19.  Ms Cheng’s response was that the trustee should hold his hand and await the outcome of the objection procedure before exercising section 43A powers.  But there is nothing in the Bankruptcy Ordinance that so provides.  If Ms Cheng’s construction were correct, it would mean that during the period an interim order is in force, the trustee’s powers under section 43A are to be held in abeyance.  Section 43A itself does not support such a reading.  In my view, it is not open to this court to adopt a construction that would be tantamount to rewriting the statutory provision.

20.  Then there are the bankruptcy offences in Part VIII which prohibit the bankrupt from doing certain specified things, such as obtaining credit while he remains an undischarged bankrupt.  Suppose that during the currency of an interim order, a bankrupt were to obtain credit.  The interim order is subsequently discharged but the date of discharge from bankruptcy is backdated.  Would this mean that he could neither be prosecuted nor convicted for obtaining credit while an undischarged bankrupt?  Even Ms Cheng refrained from adopting such an extreme position.  She accepted that at the point in time when the act was done the bankrupt had not been discharged from bankruptcy.

21.  In my view, interim orders are analogous to ex parte injunctions.  An ex parte injunction may ultimately be discharged for reasons such as material nondisclosure etc.  Nevertheless, until such time as it is discharged, it is in force and must be obeyed.  Its discharge does not mean that history can be rewritten and the slate wiped clean as if the injunction had never been issued in the first place for, meanwhile, the party subject to the injunction must comply with the injunction and any breach of the injunction during the period it was in force remains a breach notwithstanding its subsequent discharge.  Analytically, interim orders are no different.

22.  In conclusion, the court has no power to ‘backdate’ the date of discharge of a bankrupt.  The proper order to make when an interim order has been made, and the objection summons is finally disposed of without any substantive order being made under section 30A(3) is to discharge the interim order, and to declare that the bankrupt is discharged from bankruptcy with effect from that date.  In this regard, I consider that in Wong’s case, the objection summons was, by implication, dismissed by the registrar on 9 August 2007.

Unfairness

23.  In an ideal world, objection summonses for an order under section 30A(3) should be disposed of finally before the automatic discharge date i.e. the date the bankrupt would have been discharged but for the objection.  But, as earlier noted, given the timeframe stipulated by section 30A for the making of objections to the discharge of a bankrupt, such objections are invariably lodged shortly prior to the expiration of the relevant period, with the unavoidable consequence that the hearing of the substantive objection will almost invariably have to take place after the expiration of the relevant period.

24.  A number of different scenarios could arise: (1) the objection summons is finally disposed of some months after the automatic discharge date (Chan’s case); (2) an order is made under section 30A(3) at the substantive hearing extending the bankruptcy period beyond the date of the substantive hearing; (3) an order is made under section 30A(3) at the substantive hearing extending the relevant period by three months, but the substantive hearing itself did not take place until six months after the automatic discharge date.  Those within scenarios (1) and (3) have a legitimate grievance.

25.  Whilst, operationally, it may not be practicable wholly to eliminate the prejudice that a bankrupt might suffer through the de facto postponement of the date of his discharge, it does not mean that nothing can be done to ameliorate the situation and so minimize the resulting prejudice.  For that reason, I consider it of cardinal importance that all reasonable and practicable steps be taken to ensure that objection summonses are heard and disposed of upon an expedited basis.  I would suggest that consideration be given to a Practice Direction that would achieve this objective.

Hon Stone J:

26.  I respectfully agree with the reasons for judgment of Le Pichon JA.