RE FUNG CHI FONG

HCB 4235/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 4235 OF 2000

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D E C I S I O N

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Background

1.  This is the Official Receiver’s application to set aside or annul the administration order made against Fung Chi Fong (deceased) (“Deceased”) on 17 January 2001 (“Administration Order”), to dismiss the petition for administration order and to make consequential orders.  The application is opposed by the petitioner (“Madam Ye”) on the instruction of the Director of Legal Aid.

2.  The Administration Order was made under the following circumstances.  The Deceased married Madam Ye in 1938 and then Chan Lup-ying (“Madam Chan”) in 1945 in Shanghai.  He came to Hong Kong in 1957 and was joined by Madam Chan in 1962, while Madam Ye stayed in Shanghai.  In 1987 the Deceased made a will leaving the entirety of his estate to Madam Chan.  In the same year, Madam Ye joined her daughter in England and later she moved to Canada where she is now residing.

3.  The Deceased died on 25 January 1993 in Macau. Madam Ye issued proceedings in HCMP 3459/1995 seeking financial provisions for herself under the repealed Deceased’s Family Maintenance Ordinance (“DFMO”) and the Inheritance (Provision for Family and Dependants) Ordinance, Cap 481 (“IPFDO”). After trial, Cheung J, as he then was, found that the net value of the Deceased’s estate at the time of the Deceased’s death in January 1993 and as at the trial in January 1999 was about $10 million and about $3.2 million respectively.  His Lordship made an order under the DFMO that the Deceased’s estate to make a monthly payment of $6,000 to Madam Ye from 1 February 1999 until her death or re-marriage.  In July 1999, his Lordship amended the order under the IPFDO, ordering Madam Chan as the named executrix of the will of the Deceased to pay a monthly sum of $6,000 from 1 February 1999 to 2 March 1999, a lump sum of $1,200,000 from the Deceased’s estate and costs of the proceedings from the residuary estate (“maintenance order”).  Specifically, his Lordship ordered that a parking space and a flat in Taikoo Shing registered in the name of the Deceased be sold by Madam Chan as executrix at not less than $400,000 and $2,900,000 respectively to satisfy part of the judgment debt.  No probate or letter of administration was taken out.  The flat in Taikoo Shing was sold and the surplus proceeds of $64,485.04 were paid to madam Yee on 26 July 1999.  The balance of the judgment debt remained unsatisfied.  On 30 October 2000, Madam Ye filed a petition for an administration order against the estate for the outstanding amount of $2,688,807.38.  On 17 January 2001, the Administration Order was made ordering the Deceased’s estate be administered in bankruptcy and the Official Receiver be appointed the trustee of the Deceased’s estate.  

4.  Little was achieved by way of administration of the Deceased’s estate.  The Official Receiver realised $26,395.16 in cash and identified the car parking space with an estimated market price of approximately $500,000.  Then in May 2007, the Official Receiver formed the view that the Administration Order ought not to have been made in the first place and invited the Director of Legal Aid to take steps to have it annulled. That invitation was refused.  After another three years, the Official Receiver took out the present summons on 13 October 2010.

The application

5.  Section 112(1) of the Bankruptcy Ordinance, Cap 6, gives the court power upon the application by a creditor of a deceased debtor to make an order for the administration in bankruptcy of the estate of the deceased debtor according to the law of bankruptcy.  Section 112(2) provides for the requirements for making an administration order.  These two sub-sections provide as follows:

“(1) Any creditor of a deceased debtor whose debt would have been sufficient to support a bankruptcy petition against the debtor, had he been alive, may present to the court a petition in the prescribed form praying for an order for the administration in bankruptcy of the estate of the deceased debtor, according to the law of bankruptcy.

(2) The petition shall be served on the legal personal representative of the deceased debtor … and the court may in the prescribed manner, upon proof of the petitioner’s debt, unless the court is satisfied that there is a reasonable probability that the estate will be sufficient for the payment of the debts owing by the deceased, make an order for the administration in bankruptcy of the deceased debtor’s estate or may upon cause shown dismiss the petition with or without costs.”

6.  The Official Receiver relied on two grounds in support of the application.  Firstly, under section 112(1), only a creditor of a deceased debtor is entitled to petition for an administration order.  Madam Ye being a creditor of the Deceased’s estate, as opposed to being a creditor of the Deceased, could not have been entitled to make the petition.  The Official Receiver relied on In re Kitson, ex parte Thomas Sugden & Son, Limited [1911] 2 KB 109.  Secondly, the Official Receiver argued that the Deceased was not insolvent at the time of his death.  The expression “not insolvent” is a shorthand expression of the requirement under section 112(2) that there be a reasonable probability that the estate will be sufficient for the payment of the debts owing by the Deceased’s estate.

7.  Madam Ye opposed the application on three fronts.  Firstly, Madam Ye’s counsel, Mr Mak, argued that by reason of relation back, the maintenance order took effect from the first moment of the day of the Deceased’s death as to make Madam Ye a creditor of the Deceased.  Secondly, Mr Mak argued that there is no requirement under section 112 that the deceased must have died insolvent for an administration order to be made.  The test is simply whether the estate can pay its liability out of cash or readily realizable assets in its hands at the time the petition was made or adjudicated upon.  Madam Ye’s case is that the Deceased’s estate could not.  Lastly, Mr Mak argued that in any event by reason of delay, the discretion to rescind the Administration Order should not be exercised.

8.  The issues raised by this application are:

(1) whether for the purpose of section 112, “any creditor of a deceased debtor” means only persons who became creditors of the deceased debtor before his date of death, i.e. the petitioning debt based on which an administration order is sought must have been incurred during the lifetime of the deceased;

(2) whether Madam Ye was a creditor qualified to petition for an administration order;

(3) what is the proper test as to whether there is a reasonable probability that the deceased’s estate will be sufficient for the payment of the debts;

(4) whether that test was met in the present case; and

(5) whether on the facts of the present case the Court’s discretion should be exercised in favour of rescinding the Administration Order.

Jurisdiction to annul or rescind an administration order

9.  Ms Wu, Assistant Principal Solicitor for the Official Receiver, fairly drew my attention to the absence of statutory provision under the Bankruptcy Ordinance which gives the court power to rescind or set aside an administration order.  She relied on the general power of the court under sections 97 and 98 of the Bankruptcy Ordinance.  

10.  Section 97 gives the court power to decide all questions of priorities and all other questions whatsoever whether of law or fact, which may arise in any case of bankruptcy coming within the cognizance of the court or which the court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case.  I think there are differences between an administration order and a bankruptcy order: see Fletcher Law of Bankruptcy (1978).  The power under section 97 is in relation to matters which may arise in any case of bankruptcy, which certainly do not include administration of estate of a deceased.

11.  Section 98 is apposite.  The section gives the court or the Registrar of the High Court power to review, rescind or vary any order made by it or him, as the case may be, under its or his bankruptcy jurisdiction.  In In re Tang Man Sit [1998] 3 HKC, Le Pichon J, as she  then was, had to deal with this question of jurisdiction in relation to an administration order.  Her Ladyship held that section 98 confers wide jurisdiction on the court, including power to rescind an administration order.  Her Ladyship said at 560:

“Although the effect of an order under s 112 is equivalent to an adjudication of bankruptcy in the case of a living debtor, there are certain differences which is unnecessary to go into for present purposes. The topic is discussed in detail in Fletcher (op cit) at pp 353-360.

An order made under s 112 whilst akin to, is different from, a bankruptcy order: it is an order for administration. This is the only order that is made unlike the case with a living debtor which would involve the making of a receiving order as well as a bankruptcy order.

Section 98 of Cap 6 reads as follows:

(1) The court or the registrar may review, rescind or vary any order made by it or him, as the case may be, under its or his bankruptcy jurisdiction.

This section confers very wide jurisdiction on the court. As noted above, it is invoked to rescind a receiving order when a bankruptcy order is annulled. In the case of an order under s 112, this power may similarly be exercised to rescind the administration order. I do not see that an administration order has to be annulled since it is not a bankruptcy order.”

12.  I respectfully adopt that opinion.  The power under section 112 to make administration order under the Bankruptcy Ordinance must be fairly regarded as the bankruptcy jurisdiction under that ordinance. Mr Mak did not seek to dispute the Court’s jurisdiction to rescind an administration order.

Construction of the phrase “any creditor of a deceased debtor”

13.  The Official Receiver relied on In re Kitson on the construction of this phrase.  In that case, the deceased was a grocer and cartage contractor.  He bequeathed all his real and personal estate to the trustees upon trust to sell and convert with power to the trustees to postpone the sale of any part of the estate.  He appointed his wife and two others to be trustees and executors of his will.  The widow proved the will and became the executrix.  However, she did not sell the business but carried it on under the same style as before.  She incurred debts to the respondents who sought an administrator order under section 125 of the Bankruptcy Act 1883.  Section 125 of the Bankruptcy Act 1883 was equivalent to our section 112.  The appellants, who were creditors of the deceased, applied for administration of the deceased estate in the Chancery Division.  The county court granted an administration order to the respondents.  On appeal, Phillimore J held that the respondents, who became creditors subsequent to the deceased’s death, were not creditors of the deceased and allowed the appeal.  His Lordship held at 114:

“That order is, in my opinion, as bad as it can be. The jurisdiction to make an order under s. 125 does not extend beyond the powers given by the section, which provides that “any creditor of a deceased debtor may present to the Court a petition in the prescribed form praying for an order for the administration of the estate of the deceased debtor, according to the law of bankruptcy.” The respondents are not creditors of a deceased debtor. They claim to have become creditors, subsequently to the debtor’s death, of the business which has been carried on by the executrix. There may be a question whether they have any claim against the estate of the deceased man and whether their remedy is not solely against the executrix personally, but in any case, not being creditors of a deceased debtor, they do not come within s. 125. For these reasons I am of opinion that this appeal must be allowed.”

Horridge J concurred and said that clearly the order of the county court was wrongly made.

14.  Mr Mak argued that In re Kitson is not on the point and sought to distinguish it from the present case on the basis that the subject debt in that case was a debt incurred by the executrix, whereas the subject debt in the present case was a debt owed by the estate of the Deceased.  I agree that the nature of the two debts were different.  However, the fact that the debt was incurred by the executrix after the death of the deceased was merely a finding of fact of the court.  It was not the basis on which the court reached its construction of the phrase “any creditor of a deceased debtor”.  Rather, it was the fact to which the construction was applied resulting in the making of the administration order.  Similarly, subject to Mr Mak’s argument on relation back, the petitioning debt in the present case was incurred after the Deceased’s death.  I do not think the nature of the debt is a good reason for distinguishing the two cases.

15.  Mr Mak then argued that the Official Receiver was relying on the words “had he been alive” in section 112(1) to support the construction that only creditors who became creditors of the deceased debtor during his lifetime locus standi under section 112 to petition for the administration order.  That was not, to my understanding, the argument of Ms Wu.  She was simply relying on the dicta in In re Kitson.  That was also not the basis of the decision in In re Kitson: see paragraph 13 above and paragraph 23 below.

16.  Returning to Mr Mak’s submission, he argued that section 112 was copied from section 130 of the Bankruptcy Act 1914, which in turn was based on section 125 of the Bankruptcy Act 1883.  He said that while the Bankruptcy Ordinance underwent substantial amendments in 1990 with introduction of certain provisions of the Insolvency Act 1986, section 112 remains unchanged in its archaic form.  Hence, Mr Mak submitted that given its ancient origin, the phrase applies to all other pre-conditions relating to the debt, debtors and creditors as provided for in other parts of the Act to petition for administration orders.  I accept that as correct so far as the words “had he been alive” are concerned.  That precisely delineates an administration order from bankruptcy order.

17.  Mr Mak further submitted that Ms Wu’s construction of the phrase “any creditor of a deceased debtor” could not have been the result of a literal reading of the words in their proper context.  He argued that  had legislature so intended, it would have easily adopted the formula of “a creditor of the deceased debtor before his death”.  That certainly would have put the matter beyond dispute.  However, the issue is what really was the intention of the legislature under its present formula without the words “before his death”?

18.  Mr Mak submitted that “any creditor of a deceased debtor” necessarily includes a creditor of the estate as at the time of death.  He supported this construction on two grounds: relation back and purposive interpretation.  Before dealing with his argument, I have two observations to make.  Firstly, Mr Mak’s formula introduced yet another difficulty or ambiguity.  A person is either dead or alive.  “Time of death” is just razor blade thin and can fall on either side of the blade depending on the context in which the phrase is used.  I think by ordinary usage, that phrase refers  to the few moments just before death.  I believe Mr Mak was only trying  to use a formula which would appear less objectionable to the Official Receiver by which he meant during the lifetime of the deceased.  However, depending on the context, the phrase is also capable of meaning the moment immediately after death.  Secondly, I do not think relation back is a construction point.  I shall deal with that later.

19.  Mr Mak’s purposive construction argument is as follows.  Insolvent estate does not necessarily have to be administered by reference to bankruptcy laws.  An administration order entrusts the Official Receiver with the duty to take over the estate and to administer the estate in accordance with bankruptcy law, subject to modifications provided in the sub-sections.  The effect of section 112 is to deal with the mode of administration and not with the subject matter to be administered.  Thus the purpose of the section is clear.  It is to bring about an administration that is fair to all persons interested in the due administration of an insolvent estate.  That must be the purpose of section 112. 

20.  Then Mr Mak referred to section 8 of DFMO and section 21 of IPFDO, under which maintenance orders made under those ordinances are deemed to have had effect on the date of death of the deceased or as from the death of the deceased which, in my view, means the same thing.  Against that background, he argued that a judgment creditor of a maintenance order becomes interested in the administration of the estate  as from the death of the deceased and that such an interest is de facto superior to the beneficiaries’ under a will or intestacy as beneficiaries have no vested interest in any part of the estate before distribution but a judgment creditor of a maintenance order has a vested interest to be paid out of the net estate.  Hence, if a judgment creditor of a maintenance order is precluded from seeking an administration order, the result would be that whilst all the estate would be subject to the maintenance order made, the receiving party of such a maintenance order, who actually has an interest superior to all other beneficiaries and creditors, cannot seek an administration order for his or her benefits. This would create disparity between the judgment creditor of a maintenance order and other creditors or beneficiaries of the estate and render the maintenance order less effective, if not nugatory.  Hence, Mr Mak argued that “any creditor of the deceased debtor” should be read as including “any creditor of the deceased debtor at the time of his death”, otherwise it would be manifestly contrary to the purpose of section 112.

21.  I can appreciate the force of Mr Mak’s argument from point  of view of a judgment creditor of a maintenance order.  But section 112 provides a regime for the administration of estates of all deceased debtors and not just one particular class of deceased debtors against whose estates maintenance orders have been made.  Were I to construe the DFMO or IPFDO, I would adopt the sort of approach as submitted by Mr Mak.  But  I am quite unable to do so when construing section 112 of the Bankruptcy Ordinance under the insolvency regime.  The purpose of the section, as Mr Mak put it, is to bring about an administration that is fair to all persons interested in the due administration of an insolvent’s estate.  The creditors which the section has in mind are general creditors of the deceased, which on a fair reading of the section means creditors in respect of debts created during the lifetime of the deceased.  If a debt is created on behalf of the deceased after his death by another, the creditor can claim against the estate or perhaps that other person who actually created the debt.  He is  not entitled to seek an administration order.  A judgment creditor of a maintenance order is in a peculiar position. The debt was not created by the deceased, but by statute.  It could not have been created during the lifetime of the deceased but only upon his death and related back by law   to the date of death.  On the face, the judgment creditor of a maintenance order falls outside the ambit of section 112.  In my view, it is not permissible to construe the section in the twisted manner as submitted by Mr Mak for the purpose of including a judgment creditor of a maintenance order but excluding all other creditors in respect of debts created after the death of the deceased debtor. 

22.  As for the injustice which Mr Mak complained of, I think it is being exaggerated.  The case of In re Sarjeant [1923] Ch 302 which he quoted is precisely on the point.  In that case, Astbury J quoting the English Court of Appeal authority in Hasluck v Clark [1899] 1 QB 699, said that section 125 of the Bankruptcy Act 1914, which is the equivalent of our section 112, only dealt with the mode of administration and not with the subject matter to be administered, i.e. the estate of the deceased debtor.  Section 112 does not vest the estate in the judgment creditor of a maintenance order.  The judgment creditor obtains his interest from the maintenance order.  The section confers no additional benefit over the judgment creditor of a maintenance order.  If he were able to obtain an administration order, he would only obtain the advantage of administering the estate and thereby the convenience of recovering the debt.  He can similarly enforce his judgment against the estate by invoking any of the enforcement processes available to a judgment creditor.

23.  Returning to In re Kitson, Phillimore J held that the phrase “any creditor of a deceased debtor” meant any creditor of a deceased debtor in respect of debts created during his lifetime.  That phrase was written in simple language which is not archaic despite its antiquity.  His Lordship did not reach that construction by relying on the phrase “had he been alive”.  His Lordship took a very strict literal interpretation of that phrase, which was what that phrase would usually be understood by the ordinary people.  That interpretation is clearly right.  Though that case was not of very high authority, it has survived the test of time.  Ms Wu submitted that that is the proper way the phrase should be construed. I cannot agree with her more.

Whether Madam Ye was a qualified creditor under section 112

24.  I now turn to consider the factual question whether Madam Ye was a creditor qualified to petition for an administration order under section 112.  This is where, I think, Mr Mak’s argument of relation back is relevant.  I therefore deal with his submission as a submission on the facts rather than as submission on statutory construction.

25.  Mr Mak argued ingeniously by piling Ossa upon Pelion that the maintenance order was effective before the death of the Deceased, so that Madam Ye became a creditor of the Deceased within the meaning of section 112.  His argument is based on two fictions.  Firstly, he relied  on the statutory presumption under section 8 of the DFMO and section 21 of the IPFDO that a maintenance order is deemed to have had effect on the date of death of the deceased or from the death of the deceased.  Then by relying on the judicial fiction that a judicial act is presumed to have been made on the first moment of the day when it was done and takes precedence over non-judicial acts on the same day, he argued that the maintenance order was made on the first moment of the day of the Deceased’s death.  Hence, he submitted that the combined effect of these two fictions was that the maintenance order was made on the first moment of the day of the Deceased’s death but while still during his lifetime. 

26.  Mr Mak drew support for the use of combined fiction from the case of In re Palmer, deceased [1994] Ch 316 in which such combined fictions was used by the first instance judge.  On appeal, the English Court of Appeal neither approved nor expressly disapproved the use of combined fictions but allowed the appeal on the basis that the rule of relation back of judicial acts could not be allowed to operate so that, by piling one fiction upon another, a statutory instrument modifying primary legislation is to be construed in such a manner as to render it prima facie ultra vires.  Mr Mak argued that the use of combined fictions had not been expressly disapproved by the Court of Appeal and should be used in the present case.  He further argued that the effect of its use would not produce any such anomalies as in In re Palmer, deceased or offend any precedent or common sense.  He said it would even bring harmony between the Bankruptcy Ordinance and the IPFDO.

27.  Ingenious though his submission may be, with respect I am unable to agree.  In re Palmer, deceased, Balcombe LJ commented about the first instance judge’s use of combined fictions and the rule of relation back of judicial acts at 344 as follows:

“The judge achieved the result of vesting the half share in the trustee by applying the ‘general rule’ that a judicial act is presumed to have been made on the first moment of the day when it was done and takes precedence over the non-judicial acts on the same day. As he said, ante, p. 326:

‘This general rule must, it seems to me, apply a fortiori where, as here, a judicial act, the making of an insolvency administration order, is to be treated as having been done on (and not from) the date of the debtor’s death. There is no other point of time to which it can be related and no judicial act competing with it. It follows that for the purposes of the definition of the deceased debtor’s estate in section 283 as modified by the Order, the insolvency administration order must be treated as having been made on the same day as, but before, the death of the debtor.’

Thus to the one legislative fiction - that for the purposes of section 283 the insolvency administration order made on 17 August 1991 was treated as having been made on 22 November 1990 - there was added another judicial fiction - that that order was made at the first moment of 22 November 1990 before the moment of the death which gave rise to all subsequent events. This is indeed to pile Ossa upon Pelion.

However I question whether this ‘general rule’ necessarily has the effect attributed to it by the judge. It is of considerable antiquity, going back at least to Shelley’s Case (1581) 1 Co. Rep. 93 (the origin of the eponymous rule), and its high-water mark is Wright v. Mills (1859) 4 H. & N. 488, where it was held that a judgment signed at 11 a.m. on the day on which the debtor had died at 9.30 a.m. was a regular judgment, since the judgment was deemed to have been signed at the first moment of the day in question. However the universality of the rule was already being questioned by the last quarter of the 19^th century. In Clarke v. Bradlaugh (1881) 8 Q.B.D. 63, Lord Coleridge C.J. said, at p. 66, that he did not recognise the universality of the rule even as to judicial acts; Baggallay L.J., at p. 67, said he did not desire to be considered as holding the rule to be inflexible, while Brett L.J., at p. 68, said he knew of no principle upon which the rule could be founded. In more recent times this court in In re Seaford, decd. [1968] P. 53 has held that this common law rule has no application in matrimonial proceedings. In the course of their judgments the members of the court expressed considerable distaste for the rule. Thus Willmer L.J. said, at pp. 68, 69:

‘The doctrine, after all, is a highly artificial doctrine, resting as it does upon a legal fiction, and I think that it is fair to ask the question why, in reason, it should be regarded as applicable to what was then a new jurisdiction, more particularly in a case like the present where all the essential facts are known. . . . we should not be bound by any technical rule to find a fictional answer where the actual facts are known.’

Russell L.J. said, at p. 73:

‘We have been referred to a number of authorities on the matter of this fiction of the law that a judicial act is performed at a particular time, when everyone knows that it was not then performed. None of these authorities decides that the fiction is applicable to a judicial act purported to be performed at a time when the court was entirely without jurisdiction to perform it, and which was, therefore, necessarily an absolute nullity. Without authority binding me to do so I should decline to import into the law of England the equation Nullity plus Fiction equals Reality. At 10 a.m. on 6 July, 1965, when the judicial act was purported to be performed of filing the lodged application so as to determine the plaintiff’s marriage to the deceased by decree absolute, the marriage had ceased to exist [because of the husband's death earlier that day] and the ability of the court to determine it was equally non-existent, whether the court knew or was ignorant of that situation. Whom God had put asunder no man could join together, even for the purpose of putting them asunder again.’

If it were necessary for the purpose of this case I would be prepared to hold that it is now time that this ancient rule should be given its quietus in so far as it operates to require the court to assume something that is known to be untrue.

However for present purposes it is sufficient to say that in my judgment the rule cannot be allowed to operate so that, by piling one fiction upon another, a statutory instrument modifying primary legislation is to be construed in such manner as to render it prima facie ultra vires.”

28.  I have quoted extensively from In re Palmer, deceased.  The above passages show that though the Court of Appeal did not reject the  use of combined fiction, it seriously criticised the rule of relation back of judicial acts, which is one of the two pillars of Mr Mak’s argument.  Balcombe LJ held that that rule cannot be allowed to operate so that by piling one fiction upon another a statutory instrument is to be construed as to render it prima facie ultra vires.  While the rule was not expressly rejected by the Court of Appeal, its validity was seriously questioned.  That rule was antique dating back to at least the Shelley’s case in 1581. It was of doubtful universality.  It was seriously criticised as unprincipled and highly artificial.  Though Balcombe LJ held it was unnecessary to determine the validity of that rule, his Lordship was prepared to give that ancient rule its quietus in so far as it operates to require the court to assume something that is known to be untrue.  This is where I have to pick up from that case. 

29.  Mr Mak agreed that an executor derives title and authority from the will and not technically from the probate.  The estate will therefore vest immediately on death in the executor and there is no need for an intermediate notional vesting provided for in cases of intestacy: see section 10 of the Probate and Administration Ordinance.  Under the maintenance order all payments were ordered to be made by Madam Chan as the executrix of the will of the Deceased.  Section 4 of the DFMO provided that the court is to order payment out of the net estate of the deceased.  As submitted by Mr Mak, the maintenance order was made against Madam Chan in her representative capacity against the estate.  Thus, even on Mr Mak’s case, the debt was a debt against the estate of the Deceased.  That must necessarily mean that the debt was created after the death of the Deceased.  It is not known when the Deceased died on his date of death.  But even with the aid of the presumption under the DFMO and IPFDO, the debt could not have been created until after the Deceased died.  That rule of relation back of judicial acts therefore will create yet another fiction which would require the court to assume something which it knows to be untrue.  Just as Balcombe LJ had to dis-apply the rule if its application would result in a statutory instrument modifying primary legislation to be construed in such manner as to render it prima facie ultra vires, I have to dis-apply that rule as its application would require the Court to assume something which it knows to be untrue. Accordingly, I find that Madam Ye was not a creditor of the Deceased,  but of his estate.  This conclusion would be sufficient to dispose of the application.

The proper test as to whether there is a reasonable probability that the Deceased’s estate will be sufficient for the payment of the debts

30.  The second basis of the Official Receiver’s application is that the Deceased was not insolvent whether at the time of Deceased’s death in 1993 or at the time of making of the maintenance order in March 1999.  This raises the questions: what is the proper test as to whether there is a reasonable probability that the estate will be sufficient for the payment  of the debts and the point of time when the test should be applied.

31.  On the issue of timing of insolvency, Mr Mak submitted that there is no requirement under section 112 that the section only applies to cases where the deceased was insolvent at the time of his death.  In In re Young Pak-lan deceased [1972] HKLR 288, the deceased died in November 1964.  In August 1965, the Official Administrator, being of the opinion that the estate of the deceased was insufficient to meet its debts due to a decline in the value of the properties comprising the estate, petitioned for an administration order.  Blaire-Kerr, SPJ observed at 296:

“The creditor or the Official Administrator is not required to prove to the court that the deceased debtor died insolvent. The prescribed forms of petition (forms 134 and 135)* simply recite that the estate of the deceased debtor is indebted to the creditor and that the estate is insufficient to pay his debts, that is to say insufficient as at the date of the application for the order for administration in bankruptcy. Section 112 draws no distinction between the case of a debtor who, it is said, died insolvent and the case of a debtor whose estate, it is said, becomes insolvent at some later date.”

According to the above dicta, it matters not whether the deceased died insolvent or his estate became insolvent after his death. The petitioner for an administration order is only required to show the estate is insolvent at the time of application.

32.  Ms Wu argued that In re Young Pak-lan deceased was about priority of payment of debs, i.e. whether estate duty was a preferential statutory debt due to the Crown under section 38(6) of the Bankruptcy Ordinance.  The estate consisted largely of leasehold property.  The timing of valuation of those assets obviously affected the question whether the estate was sufficient to cover all the deceased’s debts.  She submitted that the case was not about the estate of the deceased becoming insolvent as a result of subsequent debts arising after his death.  The discussions were only on whether the section meant that the deceased’s estate must be insolvent by reference to valuation at the time of death before the priority set out in that section could apply to an administration under section 112.  That certainly was the central issue in dispute in that case.  The above  dicta of Blair-Kerr SPJ was obiter.

33.  However, I agree with his Lordship’s opinion.  Section 112 provides a very simple and summary regime for administering the estate of a deceased debtor which may be insufficient for the payment of its debts.  What is important is whether the estate is insufficient to pay its debts and not when it becomes insufficient.  To invoke this regime, what a creditor has to do is to file and serve the petition on the personal representative of the deceased debtor and prove his debt.  Under section 112(2), the court may make an order for administration in bankruptcy unless it is satisfied that there is a reasonable probability that the estate will be sufficient for  the payment of the debts.  The section did not expressly require that the deceased must be insolvent at the time of death or at any time.  Naturally, what the court has to consider is the condition of the estate at the time      of hearing the application.  To hold otherwise would lead to absurd results.  A deceased may die solvent, but his estate might become insolvent, for example, as a result of depreciation in value of its property or loss in  rental income.  The creditors would need the benefit of this summary administration.  On the other hand, a deceased may die insolvent but his estate might become solvent as a result of unanticipated payments falling into the estate.  In the circumstances, the personal representative’s right to administer the estate should not be deferred to the creditors who have no need for the benefit of this regime.  On a fair reading of section 112, I have no difficulties in holding that regardless of the condition of the deceased’s estate at the time of death, any creditor of the deceased is entitled to petition for an administration order at any time. If the court is not satisfied there is a reasonable probability that the estate, whether at the time of     the petition or at the time of hearing of the petition, is sufficient to pay its debts, it may make the administration order. 

34.  As for the test of that probability, Mr Mak referred to my earlier decision In re Lam Ngai Fung Tony, Ex parte Chang Tin Duk Victor, HCB 4641/2001, unreported, in which I took the view that the test of whether a debtor appears to have no reasonable prospect of being able to pay a debt is whether the debtor cannot pay the debt out of cash or readily realisable assets in his hands, i.e. whether the debtor is cash flow insolvent.  Mr Mak suggested that test is also applicable for determining the question whether there is a reasonable probability that the estate will be sufficient for the payment of the debts.  Ms Wu was contented to take a quantitative comparison of the total value of the assets in the estate against its total liabilities, i.e. whether the deceased debtor was balance sheet insolvent.

35.  The test in In re Lam Ngai Fung Tony, Ex parte Chang Tin Duk Victor was borrowed from company winding-up cases for the purpose of determining whether a company is unable to pay its debts as they fall due under section 123(1)(e) of the Insolvency Act 1986 in a winding up petition.  The words “as they fall due” are important.  It is these words which give rise to the company’s need to pay its debts out of cash or readily realisable assets of the company in that test.

36.  But, there is an important difference between a company, especially one which is a going concern, and the estate of a deceased. The purpose of an on-going company is to continue its business. The estate of the deceased has only one fate, that is to be wound up for paying its debts and for distribution of the surplus, if any.  Thus, the test for determining whether a company can pay its debts as they fall due is certainly not suitable for determining whether there is a reasonable probability that the estate will be sufficient for the payment of the debts owing by the deceased for the purpose of section 112 of the Bankruptcy Ordinance.  That probability can be assessed by an objective determination of the total value of the assets of the estate against its total liabilities. If there is a deficiency, there is no probability whatever that the estate will be sufficient for the payment of its debts.  If there is a surplus, then  the question of reasonable probability arises.  That probability will have to be assessed by taking into account the likely administration and management costs and other contingencies such as the likelihood of successful recovery of debts due to the estate and the likelihood of loss to the estate in the course of the administration as a result of depreciation and other causes.  Thus, the test should be based on balance sheet solvency.  The starting point of the test is whether at the time of the petition or determination there is any surplus in the total value of the assets in the estate as compared with its total liabilities.  If there is, whether having regard to the nature of the assets, the likely costs of administration and management and all likely contingencies, the assets upon realisation will generate sufficient funds to pay the debts owing by the deceased debtor in full.

37.  In a petition for administration, the petitioning creditor bears the burden of proving the debt. Once the debt is proved, the burden shall be on whichever party who wishes to contest the petition to show that there is a reasonable probability that the estate will be sufficient to pay its debts.  In the absence of such proof to the contrary, the court may make the administration order.

Whether there is a reasonable probability that the Deceased’s estate will be sufficient to pay the petitioning debt

38.  Mr Mak argued that since the making of the maintenance order only a sum of $64,485.04 was paid by the estate leaving a total outstanding judgment debt and taxed costs in the sum of $2,688,807.38 as at the date of the petition unpaid.  The Official Receiver identified a parking space of estimated value of $500,000.  Mr Mak, therefore, argued that in the absence of material for the court to be satisfied that there was a reasonable probability that the estate will be sufficient to pay the   judgment debt, the Administration Order was rightly made.

39.  Ms Wu, on the other hand, argued on the basis of the judgment of Cheung J, as he then was, in HCMP 3459/1995, the net value of the Deceased’s estate was in the region of $10 million at the time of his death and $3.2 million in March 1999 when the maintenance order was made was.  Hence, she submitted that the estate was not insolvent and the Administration Order ought not to have been made.

40.  In reply, Mr Mak argued that most of the assets in the estate were not readily realizable such as real property and investments in  private companies.  Hence, he submitted that applying his test, the estate was insolvent.  That is not the appropriate test.  In my view, the true position is this.  Under section 112, once the debt is proved by a creditor  of the deceased debtor, the court may make an administration order. The burden, as I have said, is on the party resisting the petition to prove that there is a reasonable probability that estate will be sufficient to pay its debts.  Despite Ms Wu’s submission, apparently at the time of the application, that argument had not been advanced.  Presumably, no such evidence had been put forward by Madam Chan or any other parties.  Furthermore, Ms Wu’s submission was premised on the value of the estate as assessed in January 1999.  Almost two years lapsed by the time of the petition.  There was no evidence before the court then of  the value of the estate in 2001.  There was, therefore, no evidence to satisfy the court that the estate was not insolvent.  On the other hand, if that argument of Ms Wu had been advanced, it must have been rejected for good reasons, otherwise the Administration Order would not have  been made. Either way, it could not be said that the Administration Order ought not to have been made on the ground that there was a reasonable probability that the estate will be sufficient to pay its debts.

Whether the discretion to rescind the Administration Order should be exercised

41.  On the above analysis, the Official Receiver has proved only one ground on which the maintenance order ought not to have been made, i.e. Madam Ye was not a creditor of the Deceased, but of his estate.

42.  However, Mr Mak submitted that notwithstanding the above, the Court should exercise discretion not to rescind the Administration Order because of the delay on the part of the Official Receiver in seeking rescission and the injustice caused to Madam Ye.  He referred me to the case of In re A Debtor (No. 446 of 1918) 1 KB 461.  In that case, a debtor applied to the Registrar in bankruptcy to rescind a receiving order made against him on the ground that all his debts had, since the making of the order, been paid in full.  The Registrar refused to exercise his discretion to rescind the receiving order because the Official Receiver, without giving any reason, was of the opinion that there ought to be a public examination before the rescission.  On appeal, Lord Sterndale MR held that the Registrar was not bound by the opinion of the Official Receiver and was wrong to have put the discretion into the hands of the Official Receiver.  Atkin LJ held that in exercising his judicial discretion the Registrar had to consider the rights of the debtor as well as the rights of creditors and the interests of the public.

43.  I have no disagreement with the principle as stated by Atkin LJ as to how judicial discretion is to be exercised.  But In re A Debtor   (No. 446 of 1918) is not on the point.  Before considering the question of how a discretion is to be exercised, the court must first satisfy itself that on the fact there is a discretion to be exercised. In In re A Debtor (No. 446 of 1918), by reason of the debt the court had jurisdiction to make a receiving order and had discretion to rescind that order upon payment of the debt in full. But in the present case, the court has no jurisdiction to make such an order in the first place because Madam Ye was not a creditor of the Deceased.  Therefore, the discretion can only be exercised one way by rescinding the order which it had no jurisdiction to make.  The court cannot have discretion not to rescind because the effect of not rescinding would be to affirm the order which it had no jurisdiction to make.  Put in another way, this court has no discretion not to rescind the Administration Order which it had no jurisdiction to make in the first place. 

44.  But assuming that the court does have discretion not to rescind the Administration Order, the burden of persuading the court to exercise its discretion not to rescind shall be on the party seeking to resist the rescission, i.e. Madam Ye. Adopting Atkin LJ’s formula, Mr Mak submitted that in exercising its discretion, the Court had to consider the rights of the debtor as well as the rights of creditors and the interests of the public.  On the fact of the present case, the Deceased’s estate had no creditors other than Madam Ye.  This is just a matter between the parties only.  There is no public element.

45.  Mr Mak argued that to prevent the injustice which would be caused by the rescission is by itself a public interest.  He submitted that grave injustice had been caused to Madam Ye by reason of the delay or inaction on the part of the Official Receiver.  He said that the Official Receiver never objected to the appointment, sat on the appointment for seven years before raising the question about rescission with the Director of Legal Aid representing Madam Ye and then waited another three years before taking out the present summons.  There had been serious intermeddling of the estate which by now has probably been dissipated except for the parking space and a small amount of cash in the hands of  the Official Receiver, which are insufficient to satisfy the judgment debt.  The estate was assessed to be worth over $10 million at the time of death of the Deceased but was reduced to $3.2 by the time the maintenance order was made in March 1999.  Mr Mak argued that the Official Receiver as trustee could trace the assets of the estate but this remedy would not be available to Madam Ye as a creditor.  Hence, for this reason, Mr Mak submitted, the Administration Order ought not be rescinded.   

46.  Though the estate was estimated to be worth $3.2 million in March 1999, it is not known what had happened to the estate between then and March 2001 when the Official Receiver accepted appointment as trustee.  It might well have shrunk further.  I do not wish to surmise.  Cheung J had ordered the parking space and the flat to be sold by Madam Chan as executrix to pay the judgment debt.  Though it appeared from Cheung J’s judgment that the estate did not owe any bank any mortgage loan in respect of the flat.  But, on 26 July 1999 after hearing from counsel for Madam Chan and Madam Ye, his Lordship amended the maintenance order to the effect that the surplus proceeds of $64,485.04 after sale of the flat be paid to Madam Ye.  Mr Mak did not explain why the flat valued at $2.9 million could have shrunk to just 2.2% of its value within a few months.  It was certainly wrong for Mr Mak to suggest that the intermeddling of the estate occurred during the course of Official Receiver’s administration of the estate.  The sale of the flat must have been made to a bona fide purchaser for value without notice of the maintenance order.  The remedy of tracing in respect of the flat is no longer available. 

47.  Soon after his appointment, the Official Receiver conducted a land search in respect of the flat in Taikoo Shing, registered the Administration Order in the Land Registry in respect of the parking space, interviewed Madam Chan, made some enquiries about the parking space and the flat, collected all the cash from the Deceased’s bank accounts and sold the chattels in his safe deposit box.  The parking space has been protected by the registration of the Administration Order.  The balance of the estate consisted of valuation of the businesses held by the Deceased.  There are no other real properties in the estate to which the remedy of tracing is available.  Mr Mak’s argument about the loss of this remedy to Madam Ye was illusory.

48.  Mr Mak did not inform me why Madam Ye did not or could not have enforced maintenance order before petitioning for the Administration Order.  If Madam Ye had difficulties in enforcing the maintenance order in 1999, the Official Receiver is unlikely to be in any better position to do so through administration of the estate in bankruptcy two years later.  It was most likely that any prejudice suffered by Madam Ye was caused before the making of the Administration Order.  Madam Ye bears the burden of persuading the Court as to why the discretion to rescind should not be exercised.  Though ten years was a long time for the Official Receiver to have administered the estate, in view of the nature of the assets comprising the estate and all the circumstances, I am not satisfied that Madam Ye has discharged that burden, especially as it was her mistake to have made the petition in the first place.  Even if I have discretion to rescind or not to rescind the Administration Order, I am not persuaded as to why it should not be exercised in favour of rescission which must be the usual course for the court to take if it had no jurisdiction to make such order.

Conclusion

49.  For the above reasons, I shall rescind the Administration Order.  But before making the order, I shall invite submission as to the precise terms of the consequential direction to be given so as to ensure Madam Ye could be secured of the parking space and other properties realised by the Official Receiver for the purpose of partial satisfaction of the judgment debt.

50.  Both parties asked for costs of this application to follow the event.  In addition, the Official Receiver asked for costs of administration of the Deceased’s estate.  The petitioner, Madam Ye, is legally aided.  She is being unfortunately caught in the cross fire between the Director of Legal Aid and the Official Receiver. Any costs order made against her will have to be met from whatever limited amount she could recover from the almost dissipated estate of the Deceased.  On the other hand, the Official Receiver is partly responsible for not objecting to the petition ten years ago.  In the circumstances, I refuse the Official Receiver’s application for costs of administration of the Deceased’s estate against Madam Ye.  I make a costs order nisi that there be no order as to costs in respect of this application.