RE NG SHIU FAN

CACV 298/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 298 OF 2008

(ON APPEAL FROM HCB NO. 1201 OF 1998)

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JUDGMENT

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Hon Tang VP:

Introduction

1.   On 23 December 1998, a bankruptcy order was made against Mr Ng Shiu Fan (“Mr Ng”) on his own petition dated 3 November 1998.

2.   Mr Ng worked first as a teacher, and then as a librarian in a subsidized school from 2 September 1977 until his retirement on 31 August 2005. During his 28 years of service, he was required by Subsidized School Provident Fund Rules, Cap. 279D (“the Rules”) to contribute to the provident fund (“the Fund”) at the rate of 5% of his basic salary. The contributions were deducted from his salary monthly. For each contribution made by him, the government paid to the Fund a sum described as a government donation, varying from 5% to 15% depending on the length of his continuous service and the donation is credited to his account (rules 9(1), (2) and (3)). Under rule 13, whenever a contributor ceases to be employed as a teacher in a subsidized school for any of the specified reasons, including voluntary retirement after 10 years’ continuous contributory service, his account would be closed and the amount standing to the credit of his account at the date of cessation of employment, including all government donations and all dividends that have been declared up to and including that date, would be paid to him or his personal representative. I will refer to the amount payable as the “Benefits”.

3.   The government donation was at a rate of 5% if the contributor’s continuous contributory service is less than 10 years, 10% if it is not less than 10 years but less than 15 years, and 15% if it is not less than 15 years. Thus, the longer the service, the greater the amount of government donation. Presumably, so that a nest egg would be available to a contributor upon his retirement.

4.   As at the date of the bankruptcy order, 23 December 1998, the Benefits payable to Mr Ng was $1,285,785.35. He was discharged from bankruptcy on 23 December 2002 at which time his Benefits totalled $1,970,506.02. He continued with his employment after the bankruptcy order until his retirement on 31 August 2005 by which time the Benefits amounted $2,459,804.39.

5.   By summons issued on 19 April 2007, the Official Receiver and trustee applied for directions, pursuant to sections 82(3) and 97 of the Bankruptcy Ordinance, Cap. 6 and rule 158 of the Bankruptcy Rules, on the following questions.

“(1) whether the entitlement of Mr. Ng under the Subsidized School Provident Fund Rules, Cap. 279D (‘the Benefits’ and ‘the Rules’ respectively) formed part of his estate under sections 43 and 2 of Cap. 6 and vested in the Official Receiver and trustee pursuant to section 58 of Cap. 6;

(2) whether on Mr. Ng’s automatic discharge from bankruptcy the Benefits remained vested in the Official Receiver and trustee;

(3) whether section 85(3) of the Education Ordinance, Cap. 279 prevents the Benefits from automatic statutory vesting in the Official Receiver and trustee;

(4) whether the Official Receiver and trustee is entitled to all payments due under the Rules which would otherwise be due to Mr. Ng; and

(5) whether Mr. Ng is entitled to claim any proportion of the Benefits attributable to his service and contribution after bankruptcy or his discharge from bankruptcy.”

6.   Kwan J on 23 July 2008 answered the questions thus:

(1) Yes

(2) Yes

(3) No

(4) Yes

(5) No

The Appeal

7.   This is Mr Ng’s appeal.

8.   Mr Man, appearing for the Official Receiver, relied on the following sections of the Bankruptcy Ordinance, which provided at the material time that:

“Section 43

(1) … a bankrupt's estate comprises -

(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy;

……

Section 58

“(1) Until a trustee is appointed the Official Receiver shall be the trustee for the purposes of this Ordinance, and immediately on a debtor being adjudged bankrupt the property of the bankrupt shall vest in the trustee.

……

(3) The property of the bankrupt … shall vest in the trustee … without any conveyance, assignment or transfer whatever.”

Under section 2, “property” was given a very wide meaning:

“‘property’ (財產) includes money, goods, things in action, land and every description of property, whether real or personal and whether situate in Hong Kong or elsewhere, also obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as above defined;”

9.   On the basis of these provisions, the learned judge concluded:

“17. By these provisions, all property, including things in action, present or future, vested or contingent, belonging to or vested in the bankrupt at the date of the bankruptcy order vests in the trustee immediately on his appointment. The legal right of Mr. Ng to be paid the amount in credit in his account as provided in rule 13, namely the Benefits mentioned earlier, is an immediate chose in action and falls within the definition of ‘property’ in Cap. 6. He had a present legal right to require the board of control of the Fund to make payment to him in the future when one of the contingencies provided for in rule 13 arose. That right formed part of his estate for the purpose of section 43(1)(a) and was vested in the Official Receiver immediately on his becoming the trustee by sections 58(1) and (2). The fact that nothing was immediately payable to Mr. Ng under rule 13 at the commencement of his bankruptcy did not alter in any way the nature of the right as a chose in action, and is irrelevant to the exercise and vesting of the right (In re Landau (A Bankrupt) [1998] Ch. 223 at 232B to C and E, citing Kwok v. Commissioner of Estate Duty [1988] 1 WLR 1035 at 1040; Krasner v. Dennison [2001] Ch 76 at 96D, paras. 36 & 37; Patel v. Jones [2001] BPIR 919 at 926, para.[36]).

18. I hold that by the combined effect of the above statutory provisions, the Benefits formed part of Mr. Ng’s estate and would have vested in the Official Receiver in the absence of an effective non-alienation provision. Mr. Ng’s discharge from bankruptcy does not have the effect of transferring the ownership of the Benefits back to him. The Benefits would remain vested in the Official Receiver after his discharge.”

10.   With respect, I agree with the learned judge. This aspect of the judgment rightly was not challenged by Mr Coleman SC who appeared for Mr Ng on appeal.

11.   Mr Coleman SC, as also had Mr Jason Wong who appeared for Mr Ng below, relies on the non-alienation provisions in section 85(3) of the Education Ordinance, Cap. 279 (“section 85(3)”), which provides:

“(3) Subject to any rules made under subsection (1), no contribution or donation to or dividend or interest on a dividend from a provident fund shall be assignable or transferable or liable to be attached, sequestered or levied upon, for or in respect of any debt or claim whatsoever.”

12.   The learned judge concluded that:

“47. … in applying the ordinary and proper meaning of the relevant words and phrases – that the pension benefits shall not be ‘assignable or transferable or liable to be attached, sequestered or levied upon, for or in respect of any debt or claim whatsoever’ – I am unable to see how these words could be stretched beyond their ordinary meaning to cover the situation where the Benefits are to vest in the trustee in bankruptcy without any assignment or transfer (sections 58(1), (2) and (3) of Cap. 6).”

13.   It is obvious that the idea behind section 85(3) is that the Benefits should be allowed to grow. That purpose would be defeated if the Benefits could be assigned or transferred by a contributor. Section 85(3) should also discourage people from over-extending credit to a contributor since they cannot readily access the fund for repayment to themselves.

14.   Mr Coleman accepted, however, that once the Benefits have been paid to Mr Ng, for example, on his voluntary retirement, they would not be protected from his creditors, whether his liability to his creditors were incurred before or after his retirement. But, Mr Coleman submitted that, prior to actual payment to him, the Benefits are protected under section 85(3) such that section 58(1) of the Bankruptcy Ordinance would not apply to the Benefits. He submitted that a compulsory provident fund is obviously a compulsory scheme of savings to provide for the retirement of a contributor, and the purpose would be defeated if the Benefits should be available for his creditors on bankruptcy. But, in my view, it is difficult to understand why the right to a lump sum payment which, when paid, would be at the absolute disposal of a contributor should not vest in the Official Receiver under section 58(1) of the Bankruptcy Ordinance.

15.   In any event, the question is whether the vesting of the contingent right to the payment of these Benefits is covered by section 85(3).

16.   I agree with the learned judge that the fact that “no contribution or donation to or dividend” shall be “assignable or transferable” would not preclude the automatic vesting of the Benefits under section 58(3) of the Bankruptcy Ordinance.

17.   Mr Coleman also relied on the words “attached, sequestered”. But in my opinion, “attached” refers to an attachment of debt such as by way of attachment proceedings (O. 49) and “sequestered” refers to execution by a writ of sequestration (O. 46).

18.   In In re Landau (A Bankrupt) [1998] Ch. 223, Ferris J was concerned with a policy approved pursuant to section 226 of the Income and Corporation Taxes Act 1970 under which the bankrupt was entitled to an annuity. The policy, however, provided that:

“This policy cannot be surrendered and no annuity can be assigned or commuted except as provided …”

Ferris J accepted counsel’s submission which he summarised as follows:

“(3) There are authorities which show that the vesting of the property of a bankrupt in his trustee under the bankruptcy legislation is not to be equated with an assignment of that property. Thus in In re Riggs; Ex parte Lovell [1901] 2 K.B. 16, in which it was alleged that a lessee who had been made bankrupt on his own petition was in breach of a covenant not to assign or underlet the demised premises, Wright J. said, at p. 21:

‘On the construction of this lease, and apart from authority, I should be of opinion that in this covenant the words “assign or underlet” are used in their ordinary or popular sense, and refer only to such assignments as are directly made by the lessee as distinguished from such assignments by law as result by the statute from a petition in bankruptcy followed by adjudication.’

He went on to find that authority did not prevent him from giving effect to this view and that it made no difference that the bankruptcy had been initiated by the lessee himself. …”

19.   The English Court of Appeal in Krasner v Dennison [2001] Ch 76 adopted a different approach. As Kwan J explained:

“23. The English Court of Appeal in Krasner v. Dennison considered restrictions against alienation in annuity contracts and personal pension schemes. The provision in the former provided that the policy and the benefits payable shall not be capable in whole or in part of commutation or surrender, nor shall any annuity be capable of assignment, except by will, away from the person assured. In the personal pension schemes, it was stipulated that rights to a lump sum retirement benefit under the scheme may not be assigned or surrendered, that no pension secured with a member’s fund may be assigned or surrendered, and that the only exception is that a pension which continues to a person’s estate after his death may be assigned by his will or by his personal representative in distributing his estate. It was held the provisions did not prevent the statutory vesting of the pension rights and benefits in the trustee in bankruptcy.

24. Chadwick LJ (with whom the other members of the court agreed) held that the prohibition in the contracts and schemes was ineffective as any attempt to provide that benefits would be inalienable on bankruptcy was ineffective on grounds of public policy, and it was long established it would be contrary to public interest to allow a party to contract out of the bankruptcy code. He thought it unarguable that a mere restriction against alienation in an annuity contract or a personal pension scheme can prevent the benefits under that contract or scheme, from vesting in a trustee in bankruptcy (at 99C to F, paras. 46 and 47).

25. Where the legislature thought it right to provide protection of certain classes of pension benefits from the claims of creditors, it had enacted that an assignment of the pension rights shall be void and, sometimes in more explicit terms, provided that on the pensioner’s bankruptcy the pension should not pass to any trustee or other person, as in the Police Pensions Act 1921 considered in In re Garrett [1930] 2 Ch 137. The courts had given effect to such statutory provision by holding that it precluded vesting in a trustee in the event of bankruptcy (at 99G to H, 100B to D, paras. 48 to 50).

26. Chadwick LJ concluded that the legislature knows well how to provide, when it thinks fit, that the general public interest that a restriction on alienation shall not be enforceable against creditors in a bankruptcy should yield to some more specific element of public policy requiring the protection of pension rights, and has done so over many years. In the retirement annuity contracts and personal pension schemes under consideration, the legislature must be taken to have made a deliberate choice not to provide such protection to the pension rights when it enacted legislation to give tax relief to approved pension arrangements (at 100G to H, para. 52). The provisions in the tax statutes did not restrict the alienation of rights or benefits under annuity contracts or personal pension schemes but merely prescribed the conditions that must be satisfied for the contracts or schemes to qualify for favourable tax treatment (at 98D, para. 42).”

20.   In relation to Patel v Jones [2001] BPIR 919, Kwan J said:

“28. The prohibition against assignment of pension benefits in Patel v. Jones was contained in a statutory regulation. It provided that every benefit is not assignable and is not chargeable with that person’s debts or other liabilities. The act giving the power to make regulations stipulated that the regulations may include all or any of the provisions referred to in a schedule to the act. Some of these provisions, which were not included in the regulation, were a provision rendering void any assignment or charge on any benefit under the regulation, and a provision that on the bankruptcy of a person entitled to such benefit, no part thereof shall pass to a trustee in bankruptcy. The English Court of Appeal held, as a matter of construction, the prohibition against assignment in the regulation did not prevent the pension benefits from vesting in the trustee.

29. In reaching that decision, Mummery LJ (with whom the other members of the court agreed) drew the distinction between regulations against voluntary assignment or charging of pension benefits, which do not prevent statutory vesting in the trustee in bankruptcy, and regulations expressly providing that pension rights shall not pass to a trustee in bankruptcy. This distinction was recognised by the legislature in the provisions referred to in the schedule to the act, which were not included in the regulation in question, in contrast with other regulations made under the same act for other superannuation schemes (at 927, para. [40]). Mummery LJ preferred to rest his decision on that basis rather than on the obiter dicta in paras. 48 and 73 in Krasner v. Dennison, which concerned the effect in bankruptcy of an express provision rendering void an assignment or charge of a pension benefit under a scheme. He noted that the Court of Appeal in Lucas v. Harris (1886) 18 QBD 127 at 139 had left open the effect of such an avoidance provision in a statute in the case of bankruptcy (at 927, para. [41]).”

21.   Kwan J then dealt with legislations in Hong Kong on pension schemes. For example, she referred to section 16 of the Mandatory Provident Fund Schemes Ordinance, Cap. 485 which provides:

“34. To give an example, the Mandatory Provident Fund Schemes Ordinance, Cap. 485 provides as follows in section 16(1):

‘No part of any accrued benefits in a registered scheme in respect of a scheme member shall be taken in execution of a judgment debt or be the subject of any charge, pledge, lien, mortgage, transfer, assignment or alienation by or on behalf of the scheme member and any purported disposition to the contrary is void.’”

22.   I do not believe the wording of section 16(1) of Cap. 485 would prevent such accrued benefits from vesting in a trustee in bankruptcy. Nor would it protect the accrued benefit once paid from the creditors of a contributor.

23.   Kwan J proceeded to examine other legislations in Hong Kong, for example, the Pensions Ordinance, Cap. 89 which applies to certain public officers. Section 12 of Cap. 89 is, for all relevant purposes, identical to section 56(3). However, section 13 of the Pensions Ordinance went on to deal with the bankruptcy of a public officer and provided on bankruptcy the pensions:

“… shall cease forthwith and not become payable. …”

These legislations show clearly that the equivalent of section 56(3) of the Bankruptcy Ordinance was not regarded as sufficient to protect such pensions from the consequence of bankruptcy.

24.   There is only one other ordinance which I will mention: the Hong Kong War Memorial Pensions Ordinance, Cap. 386 which provides for the payment of pensions to persons:

“… who have contributed to the defence of Hong Kong … and spouses of such persons …”

25.   As Kwan J said:

“39. Lastly, section 19 … Cap. 386, although it does not make specific reference to bankruptcy, is in these terms:

‘(1) The entitlement of an eligible beneficiary to a pension shall not be assignable or transferable except for the purpose of –

(a) satisfying (either in whole or in part) a debt due to the Government; or

(b) satisfying an order of any court for the payment of money towards the maintenance of the spouse or former spouse or minor child of the eligible beneficiary.

(2) The entitlement of an eligible beneficiary to a pension shall not pass to any other person by operation of law.’”

26.   The learned judge was of the view that section 19(1) of Cap. 386 would prevent the right to receive a war pension from vesting in a trustee in bankruptcy. With respect, I agree for the reasons given by the learned judge:

“58. … that section 85(3) does not affect the vesting of the Benefits in the Official Receiver by virtue of section 58 of Cap. 6.”

27.   I also agree with the learned judge that:

“62. As stated by Mummery LJ in Patel v. Jones, post-bankruptcy pension contributions did not change the quality of the contingent rights, which had ceased to vest in the bankrupt and became vested in the trustee. The payments made by the bankrupt after the bankruptcy did not create new statutory rights or new contracts to which he was entitled. The effect of such contributions was to lengthen his membership of the scheme and to increase the value of the existing right, which had vested in the trustee.

63. Likewise, in Re Landau, Ferris J held that the right vested in the trustee was a present right to compel the pension provider to make payments under the policy in the future and was an immediate chose in action. The bankrupt had, in relation to the policy, the same chose in action on the date of the bankruptcy order as he had when he attained the age of 65 and the latter event did not result in anything being acquired by or devolving upon him.”

Ex parte James

28.   I now turn to consider Ex parte James [1874] LR 9 Ch App 609. Mr Coleman submitted that on the authority of Ex parte James the Benefits attributable to the periods:

(1) between the bankruptcy order and the discharge, and

(2) from discharge to retirement,

should not be retained by the Official Receiver.

29.   In Patel v Jones, deputy High Court Judge Robert Englehart QC ordered that a proportion of the pension benefits attributable to service after commencement of the bankruptcy and a sum equivalent to the “guaranteed minimum pension” (within the meaning of the Pensions Act 1993) should not vest in the estate. The learned deputy judge was impressed by counsel’s example of an employee who was aged 21 when he was made bankrupt, discharged from bankruptcy at 24 and retired at 65. However, he did not explain the basis on which he made that decision. On appeal, his decision was affirmed, as stated in the headnotes, on the basis that it:

“… could be justified by reference to the rule in Ex parte James. The payments were made by the bankrupt in the mistaken belief that the pension benefits did not belong to the estate.”

30.   Ex parte James and some subsequent authorities upon that decision have been considered by Kwan J in paras. 69 to 75 of her judgment. The learned judge referred in para. 75 of her judgment to The Law of Company Liquidation (4^th ed., 1999) where the rule was described as an “elusive and difficult principle based on morality” and to the following remarks by Scrutton LJ in In re Wigzell [1921] 2 KB 835, 845:

“Now the decisions of this court have established that though in law the money is the money of the trustee for the creditors, yet he may be restrained from enforcing his claim to it or retaining it if (and a series of phrases none of which are very definite have been used) it were not honourable – if it were not high minded – if it would be contrary to natural justice – if it would be shabby – if it would be a dirty trick for him to retain it – or to take perhaps the most temperate statement of the principle, which I find given by Buckley LJ in In re Tyler [1907] 1 KB 865, 873; and cited with approval by Atkin LJ in Thellusson’s case [1919] 2 KB 735, 762: ‘Assuming that he (the officer of the court) has a right enforceable in a court of justice, the Court of Bankruptcy or the court for the administration of estates in Chancery will not take advantage of that right if to do so would be inconsistent with natural justice and that which an honest man would do.’” (at 290D to F)

31.   In Re Clark (A Bankrupt), ex parte The Trustee v. Texaco Ltd. [1975] 1 All ER 453, Walton J described the rule in broad terms thus:

“… the rule provides that where it would be unfair for a trustee to take full advantage of his legal rights as such, the court will order him not to do so, and, indeed, will order him to return money which he may have collected.”

32.   The reasons for Kwan J’s decision can be found in the following paragraphs:

“78. Mr. Ng had made repeated objections to the Official Receiver in early 1999, orally and in writing, that the Benefits should not vest in the trustee in bankruptcy. In each instance, the Official Receiver had stated his disagreement with Mr. Ng’s position. Mr. Ng was under no misapprehension that the Official Receiver would not seek remittance of the Benefits when the amount became payable and he was aware from the beginning that the Official Receiver had written to the Education Department asking for the funds to be remitted to the trustee instead when the amount became payable to Mr. Ng. In my view, the objective circumstances indicated Mr. Ng had taken the risk that if the question of law was to be litigated, it might turn out that he was wrong about the effect of section 85(3) and that the Official Receiver’s position was correct. Mr. Ng’s situation was quite different from the bankrupt in Patel v. Jones. He cannot avail himself of a mistake of law as a ground for restitution.

79. Furthermore, for Mr. Ng to succeed in claiming restitution for mistake of law, he would need to show that had he known the true state of the law at the time, he would not have made the post-bankruptcy contributions. If he would have done so anyway, he cannot recover. He bears the burden of proof on this (Kleinwort Benson, supra. at 409F, per Lord Hope; Goff & Jones The Law of Restitution, 2007 ed., para. 4-023).

80. Mr. Ng asserted on affirmation that ‘had [he] known that the pension funds would vest in the Official Receiver as trustee, there would be no point for [him] to remain in continuous employment whether before or after the bankruptcy’. As pointed out by Mr. Man, the Rules do not contain any mechanism by which Mr. Ng could have opted out of the scheme whilst he continued to be employed in a subsidized school and contributions were deducted from his monthly salary automatically. Mr. Ng would have to establish that he would not have continued with his employment altogether so that the pension benefits attributable to the post-bankruptcy contributions would not go to satisfy the claims of his creditors. In view of the substantial expenses of Mr. Ng and his dependents at the time, as set out in his statement of affairs and the statements of earnings and property acquired during the period of his bankruptcy, it is difficult to see how it could be viable for Mr. Ng not to continue with his employment. He has provided no explanation how he could have supported himself and his family had he not continued with his employment. I am not prepared to attach weight to his assertion aforesaid. He has not discharged the burden of proving causation that but for the mistake of law, he would not have continued in his employment and thereby continuing to make contributions to the Fund after bankruptcy.

81. As Mr. Ng had assumed the risk that he was mistaken about the law on the vesting of the Benefits in the trustee, it does not appear to me there is anything unfair or unjust for the Official Receive to retain the Benefits to which the trustee is entitled under the law. In my view, the Official Receiver has not taken an unfair advantage of Mr. Ng, there was no dishonourable behaviour or a threat of dishonourable behaviour. Although under the principle in Ex parte James, the court has a discretionary jurisdiction to disregard a legal right, that discretion must be exercised on judicial principles. Where statutory provisions either expressly or by necessary implication clearly preclude the course of conduct which the principle in Ex parte James would otherwise have supported, the principle would not be given weight in that situation. Otherwise, the bankruptcy court would be free to override a piece of legislation if it is of the view that such legislation does not meet the court’s standards of justice and fairness in a given situation.

82. Here, the difficulties that arose were as a result of the provisions made by the legislature. To paraphrase the words of Slade LJ in Re T H Knitwear at 291B to C, there is nothing which should or need affect the conscience of the Official Receiver if he proceeds to distribute the assets in accordance with the ordinary rules of law and equity without regard to Mr. Ng’s claim, which has no legal basis. Whilst the Official Receiver should act honourably as an officer of the court, he is also duty bound to gather all property which properly belonged to the bankrupt’s estate.

83. I decline to direct the Official Receiver not to retain the Benefits for distribution among the creditors.

Legislative intervention

84. As in what had happened in the United Kingdom after the decisions in Re Landau and Krasner v. Dennison, the legislature should review the current unsatisfactory state of legislation on pension schemes and give serious consideration to amending the law to extend the protection to pension benefits generally in the event of bankruptcy (apart from officers in public service in a civil capacity and judicial officers, who are protected), with suitable power to the trustee to claim excessive contributions and seek income payments orders for benefits paid to a bankrupt after bankruptcy.”

33.   It appears that Kwan J decided against Mr Ng because he had not been labouring under any mistake. She thought he had assumed the risk that he was mistaken about the law. She said:

“77. … ‘A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong – and that is so whether the issue is one of fact or one of law’ (Kleinwort Benson Ltd. v. Lincoln City Council [1999] 2 AC 349 at 410C, per Lord Hope of Craighead). ‘The real point is whether the person who made the payment took the risk that he might be wrong. If he did, then he cannot recover the money’ (Deutsche Morgan Grenfell Group plc v. Inland Revenue Commissioners [2007] 1 AC 558 at 571C, per Lord Hoffmann).”

34.   It is noted however that their lordships in Deutsche Morgan, op. cit., were dealing with the circumstances under which payments made under a mistake might be recovered, whereas the rule in Ex parte James is concerned with situations where there is no legal or equitable right for recovery.

35.   It is clear from para. 81 of her judgment that Kwan J thought the rule in Ex parte James was inapplicable. She relied on the dictum of Lindsay J in Re Collins & Aikman Europe SA [2007] 1 BCLC 182 at 190 a-b cited by her at para. 75:

“I would not, however, expect the rule to have any weight where statutory provisions either expressly or by necessary implication clearly preclude the course of conduct which the rule would otherwise have supported. To that extent the rule cannot be considered other than within the surrounding statutory structure …”

36.   Lindsay J’s dictum is consistent with the decision in In re Wigzell. There, according to the headnotes:

“A receiving order was made against a debtor who thereupon applied for and obtained a stay of the advertisement of the receiving order and all proceedings thereunder pending an appeal therefrom. The appeal was subsequently dismissed and an order was made adjudicating him bankrupt. At the date of the receiving order the bankrupt had an account at a bank. After the making of the receiving order and pending the hearing of the appeal the bankrupt paid into the bank sums amounting to 165l. which he had collected from his debtors, and drew out of his account sums amounting to 199l. The bank acted in good faith and received and paid those sums in the ordinary course of business without knowing that a receiving order had been made against the bankrupt. The trustee in bankruptcy claimed a declaration that the sums paid into the bank after the date of the receiving order vested in him as trustee :-

Held, by the Divisional Court and the Court of Appeal, that the sums paid into the bank by the bankrupt after the date of the receiving order became by virtue of s. 18, sub-s. 1, s. 37, sub-s.1, and s. 38 (a), of the Bankruptcy Act, 1914, the property of his trustee in bankruptcy, and that the bank were not entitled to credit themselves with the payments out to the bankrupt, as those transactions took place after the date of the receiving order and were therefore not protected by ss. 45 and 46; that there was nothing dishonest in the trustee enforcing the rights given to him by the Act, and that the action of the Court in staying the advertisement and proceedings could not operate in any way in derogation of the rights of the trustee.”

37.   The basis of the decision was explained by Scrutton LJ at [page 861]:

“We find accordingly in s. 45 (of the Bankruptcy Act of 1914) that nothing in the Act is to invalidate certain payments by the bankrupt to his creditors or transactions of that kind, provided that both the following conditions are complied with, (1.) that the payment takes place before the date of the receiving order, and (2.) that the person to whom the payment is made has not at the time the payment is made notice of any available act of bankruptcy committed by the bankrupt before that time. The Legislature has therefore expressly laid down those two conditions as giving protection to persons dealing with the bankrupt during the doubtful period of bankruptcy. It is quite clear that between the dates of the receiving order and the advertisement there will always be some interval of delay. The Act has not provided for that event at all, although it must always happen, because the advertisement of the receiving order will always be two or three days later than the date of the receiving order.

Further at the time when the Act of 1914 was passed the practice of the Court as to staying advertisements was perfectly well known and well recognized, and the Legislature, with that practice before it, either by omission or intentionally, has not thought fit in any way to alter the language by which the date of the receiving order was fixed as the crucial date. With that statutory provision made in reference to a perfectly well known practice, can one possibly say that a trustee is not high-minded or is not honourable in acting upon the statutory provisions that he finds clearly set out before him? Can one say that the Legislature itself is not honourable or high-minded because it did not insert a provision dealing with this set of facts which must occasion hardship to some persons?”

38.   Lord Sterndale MR said in his judgment at page 854:

“What we are in substance asked to do is to alter the first proviso of s. 45 of the Act, which now runs in this way: ‘that the payment … takes place before the date of the receiving order,’ so as to make it run: ‘that the payment … takes place before the date of the receiving order or within any period during which proceedings on the receiving order are stayed.’ That to my mind is legislation. I do not think it is possible for us to do it. The Legislature has fixed the date of the receiving order, and not the date at which public notice of it is given as the date at which the trustee’s rights accrue, and I am not prepared to say that it is contrary to honourable and fair dealing and high-minded conduct to interfere with any transaction which has taken place during the stay of proceedings under the receiving order.”

39.   At 863, Scrutton LJ also said:

“On the other hand it will be a matter for Parliament to consider whether they did intentionally use the language which they have used, or whether they omitted to consider the possibilities which might result from a stay of advertisement after a receiving order. That is a matter not for this Court but for Parliament in its wisdom.”

40.   After In re Wigzell, the law was indeed amended, by section 4 of the Bankruptcy (Amendment) Act 1926 which gave limited protection to persons such as the bank in In re Wigzell unless:

“… where and in so far as the court is satisfied that it is not reasonably practicable for the trustee to recover in respect of the money or property or of some part thereof from the person to whom it was paid or transferred.”

41.   Here, we are concerned with the effect of section 58(1) of the Bankruptcy Ordinance, which “willy-nilly” vests a bankrupt’s estate in the Official Receiver. In re Wigzell clearly is distinguishable. There, the English Court of Appeal was concerned with section 45 of the Bankruptcy Act 1914, which dealt specifically with the effect of payments after an act of bankruptcy and before the making of a receiving order. The bank was seeking to extend the protection provided by section 45 by means of the rule in Ex parte James to payments made before notice of a receiving order. That was refused by the court. Indeed, the consequent legislative amendment did not go so far.

42.   I do not accept that the legislature, by section 58(1) of the Bankruptcy Ordinance, had:

“… expressly or by necessary implication clearly preclude the course of conduct which the rule would otherwise have supported. …”.

43.   In para. 73 of her judgment, Kwan J referred to Re T H Knitwear (Wholesale) Ltd [1988] 1 Ch 275, and said:

“73. … the conduct of the liquidator could not fairly be criticised, as the difficulties which arose were ‘simply the result of omissions in the relevant legislation’ and there was ‘nothing which should or need affect the liquidator’s conscience if he proceeds to distribute the assets in accordance with the ordinary rules of law and equity without regard to [the claimant’s] claim, which … has no legal basis’ (at 291B to C). …”

44.   For the present purpose, it is sufficient to observe that Re T H Knitwear (Wholesale) Ltd was not a decision that the statutory omission was deliberate so that Ex parte James could not apply. It was a decision on its facts that the rule in Ex parte James was not satisfied.

45.   I should also refer to the judgment of Younger LJ in In re Wigzell for his comments on In re Stokes [1919] 2 KB 256. His lordship said:

“… in order that I may not thereby be supposed to manifest any dislike of this principle I should wish to comment upon another case in which it arose-namely, In re Stokes (2)-where the learned judge refused to apply it to the facts that he had before him. Speaking for myself I wish to say that if that was a case in which it was necessary for the executrix of the debtor to invoke this principle at all-and I very much doubt it-l should myself have thought that having regard to the circumstances it was one in which the Court should have had no hesitation at all in applying it. The facts stated quite shortly were these: The debtor having no means whatever except those which had passed to his trustee in bankruptcy was paid by the trustee a salary in respect of services rendered by him to the trustee in connection with the administration of the estate. He had no property other than that salary. Instead of applying the whole of the salary in his day to day maintenance, or if you like in junketing or extravagance, he set apart a portion of it and paid premiums upon a policy of insurance taken out by him on his own life, obviously in order that the policy moneys might, as they did, become available for his widow after his decease. Those payments were continued by the debtor for I think about two or three years while the bankruptcy still continued. In 1883 the bankruptcy came to an end and the trustee was discharged, and from that date until the date of his death in 1917 the debtor continued out of his own money to pay the premiums upon the same policy, and in 1917, between twenty and thirty years later, he died, and the policy moneys became payable. They were left by his will to his widow, and she claimed them from the insurance office. It was held in that case-the learned judge refraining from applying this principle, if it was necessary to invoke it-that the whole of these policy moneys belonged to an improvised trustee in bankruptcy appointed for the purpose of claiming them. I should have thought myself, in the first instance, that any money applied by a bankrupt out of a salary paid to him by the trustee for services rendered and his only property, was as much his own and remained as much his own whatever he did with it as if he never had been bankrupt at all. But even if we were to carry the case not quite so far as that, I certainly hope the decision will not be allowed to discourage other judges who have similar facts brought before them from applying to these facts what in relation to them would be the most salutary principle of Ex parte James. (1) In my view if In re Stokes (2) ever comes before this Court for review of the principle on which it proceeded, it will require to be very carefully considered whether it can be justified.”

46.   As noted, in Patel v Jones, ex parte James was applied, although it appears that the mistake was only an unilateral mistake on the part of the bankrupt. Kwan J also proceeded on the basis that a unilateral mistake on Mr Ng’s part might suffice. If that be right, as I think that it is, this must be on the basis that section 58(1) of the Bankruptcy Ordinance has not expressly or by necessary implication clearly precluded the application of Ex parte James. Indeed, the dictum of Young LJ cited above supports the view that Ex parte James might apply notwithstanding the vesting of a bankrupt’s estate in the Official Receiver pursuant to the provisions of bankruptcy legislations.

47.   In the instant case we are not solely concerned with Mr Ng’s contribution, there were contributions by government as well. Nor is Mr Ng trying to recover money which had been paid by mistake. Mr Ng paid because he was required by the Rules to contribute. If there was a “mistake” it was that Mr Ng continued with the employment. The question is whether a high-minded person would have wished to retain the portion of the Benefits attributable to the period subsequent to bankruptcy. I will deal first with the period post discharge.

48.   I do not believe that a “high-minded person” would have wished to retain the post discharge Benefits.

49.   In In re Wigzell Scrutton LJ said at 861:

“… In my opinion when the Court is considering the application of the principle as a Court of Appeal in a matter of intricacy and difficulty like this, where the vague language used makes it very easy to take different views, it should not interfere with the action of a Court below which has tried to apply the principle, unless it is clearly satisfied that the view of the Court below is erroneous.”

50.   After anxious consideration I have come to the conclusion that I am entitled to interfere with the learned judge’s decision. First, because I regard her reliance on the dicta of Lord Hope and Lord Hoffmann to be misplaced for the reasons given in para. 34 above.

51.   Furthermore, I question whether Mr Ng had assumed the risk that he was mistaken about the law. There was no oral evidence on the point. I have examined the available material. The minutes of creditors’ meeting held on 1 February 1999, which was attended by Mr Ng and officers from the Official Receiver’s office, stated:

“5. Other potential assets included the Provident Fund ofHK$1,189,362.13 as at 31st December, 1998. The Official Receiver had written to the Education Department (the bankrupt's employer) concerning the- remittance of the said Provident Fund to the Official Receiver when the fund became payable to the bankrupt. However, the bankrupt informed the meeting that the Provident Fund should not be applied to repay his liabilities. He would raise objection to the remittance of the fund to this office.”

As thus recorded, the Official Receiver’s claim is ambiguous because it could be taken to refer specifically to the accrued amount. In any event, rather than to say that he had assumed the risk that he was mistaken about the law, one might say that Mr Ng mistakenly had thought that the law could not be so unreasonable. But since he was not seeking recovery on the basis of a mistake, I do not believe it greatly matters. I would also add that the Official Receiver might have applied to the court for directions in 1999, long before Mr Ng’s discharge in 2002. In which event, he might not have continued with the same employment. Lastly, I do not agree with Kwan J that because section 58(1) vested the Benefits in the Official Receiver, Ex parte James could not apply.

52.   In the case of the Benefits attributable to the period between bankruptcy and discharge, I believe that a high-minded person might well think it right to retain the money attributable to this period. After all Mr Ng’s contributions might otherwise have benefited his creditors. Indeed, I believe a “high-minded bankrupt” might not have wished to claim otherwise.

53.   For the above reason, I would allow the appeal, and answer questions 4 and 5 as follows:

(4) No

(5) Yes. Mr Ng is entitled to the proportion of the benefits attributable to his service and contribution after his discharge from bankruptcy.

54.   In the circumstances, I would make an order nisi that each party should pay his own costs both here and below. Mr Ng’s costs be taxed in accordance with legal aid regulations.

Hon Yam J:

55.   I agree with the judgment of the Vice-President.

Hon Stone J:

56.   I also agree with the judgment of the Vice-President.