RE YICK KIN CHUNG

HCB 1187/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1187 OF 2004

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D E C I S I O N

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Background

1. On 16 March 2004, a Bankruptcy Order was made in respect of Mr Yick Kin Chung (“Bankrupt”), who had petitioned for his own bankruptcy on 4 February 2004.  Flat 5 on 22^nd floor of Block B, Yat Nga Court, 3 Yat Nga Lane, Tai Po, New Territories (“Property”) was held by the Bankrupt and his wife (“Wife”) as joint tenants since its purchase in July 1991.  The total amount of debts filed by creditors and admitted by the Trustees in the bankruptcy was HK$297,700.63.  The Bankrupt made contribution of HK $3,000 into his bankruptcy estate account.

2. On 16 March 2008, the Bankrupt was automatically discharged from bankruptcy.  Shortly thereafter, on 26 September 2008, the Bankrupt died intestate, and the Wife was appointed as the personal representative of the estate.

3. There were 2 distributions of dividends.  The 1^st dividend of HK $108,900 was declared by the Trustees on 26 October 2005.  The 2^nd dividend of HK $5507.39 was declared on 22 September 2010.

4. In October 2004, December 2010 and February 2013, the Trustees had offered to sell the Bankrupt’s share of the Property to the Wife, or to sell the Property with the Wife’s half interest to a third party on the market.  The Trustees failed to receive any, or any satisfactory, response from the Wife to such offer.  Accordingly, on 23 April 2013, the Trustees applied to the Court for a declaration that the Property is held by the Bankrupt and the Wife as tenants in common in equal shares, for an order that the Property be sold pursuant to s6 of the Partition Ordinance, and that the net proceeds of sale of the Property be divided and paid to the Trustees and the Wife. 

5. According to the Trustees, the valuation of the Property as at 5 June 2014 was approximately HK $2 million.  The estimated amount of the provable debts incurred by the Bankrupt and expenses incurred up to 26 June 2014, including statutory interest calculated up to that date, was approximately HK $620,901.62.  This comprises:

a. HK $183,293.24 (outstanding amount of the provable debts);

b. HK $269,535.53 (statutory interest up to 26 June 2014);

c. HK $169,709.19 (miscellaneous expenses)

Less

d. HK $1,636.34 (current bankruptcy estate balance)

6. The Wife as the surviving spouse and personal representative of the estate of the Bankrupt is entitled to the surplus of the sale proceeds of the Property after payment in full of the bankruptcy debts of the creditors.  The Trustees claim that the surplus of the sale proceeds should first be divided between the Wife and the Bankrupt’s estate in equal shares, such that each share should be at least HK $1 million, subject to the deduction of the incidental legal costs, expenses and disbursements.  The Bankrupt’s half share of the net sale proceeds should then be used to repay to the creditors the bankruptcy debts, with interest, and the costs, charges and expenses of the proceedings, in the sum of HK $620,901.62 as aforesaid.  On this calculation, there will be a balance of HK $379,098.38 payable to the Wife as co-owner of the Property.

7. The Trustees further claim that the Wife was one of the Bankrupt’s dependents, and that the Bankrupt had financially supported his own family.  The Trustees claim that there are reasons to believe that prior to his bankruptcy, the Bankrupt had been responsible for all the mortgage loan repayments and family expenses, and accordingly, that the Bankrupt should be entitled to more than a half share of the Property.

8. On behalf of the Wife, the application for sale was opposed on the basis that the sale was not necessary for the settlement of the Bankrupt’s debts.  She claims that as a result of the Bankrupt’s automatic discharge in March 2008, pursuant to s 30A of the Bankruptcy Ordinance (“Ordinance”), he was released from all bankruptcy debts.  Interest on the released debt was not expressly excluded from the effect of the discharge as provided for in s 32 of the Ordinance.  As such, it was argued that after the discharge, no interest is payable in respect of the bankruptcy debts.  Alternatively, it was argued that any interest payable should be limited to the 4 year period before the discharge, since s 71 of the Ordinance only provides for interest on bankruptcy debts to be payable “in respect of the period during which they have been outstanding since commencement of the bankruptcy”, and after the discharge of the bankruptcy, there is no debt which is outstanding.

9. The issues raised by the Wife turn on the effect of the discharge of a bankrupt under s 30A of the Ordinance.

The relevant provisions

10. The discharge of a bankrupt is provided for in s 30A of the Ordinance, subsections (1) and (2) of which provide 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.”

11. Section 30A (8) states:

“Where a bankrupt has been discharged, he shall, notwithstanding his discharge -

(a) continue to give such information respecting his affairs; and

(b) attend on the trustee at such times, and to such other things,

as the trustee requires for the purpose of completing the administration of the estate, and if the discharged bankrupt does not comply with the requirements of this subsection, he shall be guilty of a contempt of court and may be punished accordingly on the application of a trustee.”

12. Section 32 provides for the effect of an order of discharge.  The relevant subsections of s 32 provide as follows:

“(2) Subject to subsections (1) and (3) to (8), where a bankrupt is discharged, the discharge releases him from all the bankruptcy debts, but has no effect -

(a) on the functions (so far as they remain to be carried out) of the trustee and the operation of the provisions of this Ordinance for the purposes of carrying out those functions; or

(b) on the liability of the discharged bankrupt to make continuing contributions to his estate pursuant to an order made under s 30A (9).

(3) 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.

...

(7)   Discharge does not release the bankrupt from such other provable debts, not being debts provable in his bankruptcy, as may be prescribed.”

13. The Ordinance does not prescribe any other provable debts for the purposes of s 30 A (7). 

14. Under s 2 of the Ordinance, “bankruptcy debt” is defined to mean, in relation to a bankrupt:

(a) any debt or liability to which he is subject at the commencement of the bankruptcy; and

(b) any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy.

15. Under s 58, the property of the bankrupt vests in the Official Receiver on the making of a bankruptcy order, and on the appointment of a person other than the Official Receiver as provisional trustee or trustee, the property forthwith passes to and vests in the provisional trustee or trustee appointed. 

Effect of a discharge

16. By his discharge under s 32, a bankrupt is released from all the bankruptcy debts, save for specified debts, liability for which is preserved under s 32 (1), (4) - (7). 

17. In the older English decision of In Re Moss [1905] 2 KB 307, the court considered that on discharge, a bankrupt was discharged “from liability” to pay the principal money, and it cannot be said that there was any amount due in the legal sense when no money can be recovered by any legal process.

18. In the more recent case of Law Society of England & Wales v Dixit Shah [2007] EWHC 2841 (Ch), the English court considered the effect of a discharge under s 281 of the Insolvency Act 1986.  Section 281 (1) of the Act provides that the discharge releases the bankrupt “from all the bankruptcy debts”, but has no effect on the functions of the trustee of his estate.  Unlike s 32 of the Ordinance, s 281 (1) of the Insolvency Act 1986 expressly provides that discharge does not affect the right of any creditor of the bankrupt to prove in the bankruptcy for any debt from which the bankrupt is released.  In this context, the English court held that the discharge preserves the underlying cause of action of the debt, and only bars the remedy in respect of the debt.

19. The authorities are clear that notwithstanding the bankrupt’s discharge, such discharge does not cause to be re-invested in the bankrupt any property which had vested in the trustee prior to the discharge from bankruptcy (Gosden v Dixon (1992) 107 ALR 329; Daemar v Industrial Commission of New South Wales (No 2) (1990) 99 ALR 789, followed by Hon Kwan J (as she then was) in Re Cheung Tak Wah, a Bankrupt 有關張德華 (破產人) 的事宜，HCB 4980/2004, 18 August 2009).  In relation to such property, the court held that the trustee is still bound to collect and realize the property and to distribute the proceeds among the creditors in settlement of the bankruptcy debts, notwithstanding the discharge of the bankrupt. 

20. In Re Cheung Tak Wah, a Bankrupt, Kwan J highlighted (at paragraph 27 of her judgment) the fact that under s 30A (8), the bankrupt is still obliged, despite the discharge, to give such information and do such other things as the trustee requires, for the purpose of enabling the trustee to complete the administration of the estate which, in turn, includes the realization or sale of the property vested in the trustee for distribution to the creditors.  If the discharge had the effect of releasing the debt, the trustee would have no obligation and no right to realize the property after the discharge, or to distribute the proceeds to the creditors in settlement of the released bankruptcy debt.

21. In the case of Re Choi Lai Ming, ex p Official Receiver [2006] 1 HKLRD 7, Hon Barma J (as His Lordship then was) held, in the case of a discharged bankrupt, that the secured creditor remained able and entitled to enforce his security for the payment of the debt from which the bankrupt was released by reason of his discharge.  Section 32 (3) of the Ordinance expressly provides for the position of a secured creditor, but in reaching his decision, His Lordship declined to follow Perrott v Newton King Ltd [1933] NZ LR 1131, in which the court in New Zealand held that the discharge “released” the bankrupt from the secured debts which were provable, in the sense of extinguishing the debt, and not just barring the remedy in respect thereof. 

22. The decisions in Re Cheung Tak Wah, a Bankrupt and Re Choi Lai Ming, ex p Official Receiver are consistent with the general objectives of the bankruptcy regime.  Under the bankruptcy scheme, the bankrupt surrenders his property to the trustee in bankruptcy for the benefit of his general body of creditors.  He comes under disqualifications inherent to the status of a bankrupt.  In exchange, the bankrupt comes under the protection of the scheme in that after the making of the bankruptcy order, he is protected against seizure of his assets, such that no creditor of a debt provable in the bankruptcy has any remedy against the property or person of the bankrupt (save for exceptions in respect of executions and distress) but is restricted to his right of proving in the bankruptcy.  During the bankruptcy, no claims may be brought by a creditor to whom a provable debt is owed without the leave of the court (s 12(1) of the Ordinance).  The bankrupt is released from proceedings for recovery and his creditors are left to the collective enforcement procedure under the Ordinance to secure satisfaction of their cause of action and the bankrupt’s obligations out of the assets in the hands of and vested in the trustee in bankruptcy. 

23. In Re Hide v Ex p Llynvi Coal & Iron Co (1871) LR 7 Ch App 28 at 31-32, James LJ explained the policy:

“The broad purview of (the Bankruptcy Act 1869) is, that the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, and engagements of every kind. On the other hand, all the persons from whose claims, and from the liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets.”

24. The protection referred to in paragraph 22 above ceases on the bankrupt’s discharge.  The rationale and purpose of the discharge of a bankrupt have been set out in paras 17.16 and 17.24 of the Report on Bankruptcy (May 1995) of the Law Reform Commission of Hong Kong, and referred to in the judgments of the court in Re Hui Hing Kwok [1993] 3 HKC 683 and Re Li Tat Kong [2000] 3 HKC 360.  In gist, the modern objectives of bankruptcy include rehabilitation of the debtor in the sense of enabling the bankrupt to resume a normal life in society, giving him a “fresh start” by releasing him from the burden of his debts and liabilities, and an incentive to cooperate with the trustee in the administration of his estate in order to avoid the delay of rehabilitation.

25. Having considered the authorities and the objectives of the bankruptcy scheme, I prefer the view, and so hold, that a discharge under s 32 of the Ordinance does not have the effect of extinguishing a bankruptcy debt in the sense of extinguishing the cause of action on which the obligation to pay the debt is founded.  A valid and important distinction was drawn by the court in Law Society v Dixit Shah between the remedy and the underlying cause of action.  What the discharge releases is the bankrupt’s obligation or liability to make payment of the debt in full, or to make payment otherwise than in accordance with the trustee’s due administration and distribution of the bankrupt’s assets in the course of the bankruptcy.  This, and the bar against creditors seeking their full recovery and pursuing their full remedies in respect of the debt, is the protection afforded to the bankrupt and the scheme which the creditors were bound to accept (and entitled to expect), as provided for in the Ordinance, namely, to share in the distribution of the assets and to secure a satisfaction of their underlying cause of action out of the estate in the hands of the trustee in bankruptcy, on a pari passu basis.

26. It follows that even after the discharge of the Bankrupt in this case, the Trustees are entitled and bound to realize the Property and to apply the proceeds of sale towards payment of the proved debts (as so found by the court in Re Cheung Tak Wah, a Bankrupt).  As explained in the Australian cases of Re Walker (1952) 16 ABC 69 at 72 and Re Balhorn (1981) 39 ALR 223, a discharged bankrupt “continues to be liable to certain obligations which flow from his state of bankruptcy”.

Claim to interest

27. Under s 71 of the Ordinance, where a bankruptcy debt bears interest, that interest is provable as part of the debt in respect of any period after the commencement of the bankruptcy. 

28. Under s 71 (2):

“Any surplus remaining after the payment of debts that are proved in bankruptcy shall, before being applied for any other purpose, be applied in paying interest on those debts in respect of the period during which they have been outstanding since the commencement of the bankruptcy; and interest on preferential debts ranks equally with interest on debts other than preferential debts.” (emphasis added)

29. On behalf of the Wife, it was contended that since interest is only payable in respect of the period during which any debt proved in bankruptcy was outstanding, and since the Bankrupt was discharged in 2008, the debt was released and no longer outstanding after March 2008, for any interest to be payable. 

30. The Wife does not dispute the rate of interest provided for under s 71 (the higher of the contractual rate or judgment rate specified under s 49 of the High Court Ordinance), only that it is payable at all, and alternatively, that it is only payable up to the date of the Bankrupt’s discharge.

31. I have found that the discharge of the Bankrupt does not extinguish the debt or the underlying cause of action, but only releases the Bankrupt from the liability or obligation to make full payment of the proved debt, or otherwise than as provided for by the rules under the bankruptcy scheme.  Such rules provide for the payment of interest from the surplus, pursuant to s 71 (2).  They further provide for interest to be paid from any surplus for the period during which the debt was “outstanding”.   

32. As a result of the automatic discharge, the bankruptcy debts proved and allowed by the Trustees are released, in the sense that the creditors are barred from pursuing any further remedies for recovery. However, so long as the debts are not or cannot be paid, they remain “outstanding” in the sense that they are unpaid (in part or in full), although they may no longer be due for payment, or be recoverable by legal process.

33. I therefore find that interest is payable on the bankruptcy debts from the surplus remaining after the payment of the debts proved in bankruptcy, pursuant to s 71 (2) of the Ordinance, for the period during which they have been outstanding and unpaid since the commencement of the bankruptcy.

Delay

34. In this case, I consider that there was undue delay in the steps taken by the Trustee to realize the Property. Trustees in bankruptcy have the duty to realize a bankrupt’s estate with reasonable speed. The bankruptcy order was made in March 2004. It was only in April 2013 that the Trustees applied for partition and sale of the Property. Even the Bankrupt’s death in September 2008 cannot justify the delay, particularly when Letters of Administration had been issued by June 2009.  The Trustees argued that the value of the Property has risen in the interim. This does not alter the fact that interest is payable out of the proceeds for the period of delay. Nor does the increase in value of the Property obviate the prejudice to the Wife, when the price of any other property which could have been purchased using the proceeds of sale has likewise risen, with the result that she would not be able use any such proceeds to purchase comparable property in substitution for the Property which has to be sold.

35. If I had the discretion to award interest in respect of the period for which and the rate at which interest is payable, I would have disallowed the interest payable for the period of delay in the application for the order of sale. However, under s 71 (2), interest is expressly provided to be payable on the bankruptcy debts “in respect of the period during which the bankruptcy debts have been outstanding”.  The creditors are entitled as of right to such interest for the period specified.

Other relief sought

36. There is no sufficient evidence to show that the Bankrupt had, prior to his bankruptcy, actually paid all the mortgage loan repayments as well as the family expenses.  I will not make any order, as sought by the Trustees, that the Bankrupt’s estate should receive more than half share of the Property or proceeds.

37. Nor is there evidence that, as a result of an order for sale of the Property, the Wife will suffer “very great hardship” within the meaning of Re: Leung Wang Fai HCB No 15328 of 2003, or that there are exceptional circumstances as referred to in Re Citro (A Bankrupt) [1990] 3 All ER 952, such that sale should not be ordered.  The order for sale should be made, as sought.

Orders made

38. I make the declaration sought in paragraph (a) of the Summons of 23 April 2013 (“Summons”), and the orders for sale and incidental relief in terms of paragraph (b) to (h) of the Summons. 

39. Taking into account the delay in the application for sale, and in the exercise of my discretion regarding costs, I will not make the order for the costs of the action as sought by the Trustees.  The Wife’s own costs are to be taxed in accordance with the Legal Aid Regulations.