RE LEE PIT TAT

HCB 954/1985

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 954 OF 1985

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D E C I S I O N

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1.  This is an application by the Bank of China (Hong Kong) Limited (“BOC”), made by summons issued on 15 March 2012, seeking leave to amend a proof of debt filed on behalf of the Kincheng Banking Corporation (“KBC”), a predecessor corporation of BOC, through one of its staff, Mr Ho Kai-yu, on 31 October 1990 in the bankruptcy of Mr Lee Pit-tat (“the Bankrupt”).

2.  The Bankrupt was bankrupted on the basis of a petition presented by a creditor on 3 March 1986.  A receiving order was made against him on 14 April 1986, after which the Official Receiver was appointed trustee at the first meeting of creditors which was held on 17 July 1986.  Following that, an adjudication order was made against the Bankrupt on 24 July 1986. 

3.  The Bankrupt was the owner of a property known as “the remaining portion of Lot 314 in Demarcation District 401” (“the Property”).  KBC had previously obtained a charging order over the Property in respect of a judgment debt which it had obtained against the Bankrupt.  The charging order nisi was made on 3 January 1986 and was registered against the Property on 9 January 1986.  It was subsequently made absolute on 21 January 1986 and the order absolute was registered shortly afterwards on 4 February 1986. The adjudication order against the Bankrupt was not registered against the Property until some three and a half years after it was made, on 20 November 1989.

4.  In the course of the administration of the bankruptcy, 10 proofs were lodged.  Included among those proofs was the proof from KBC for the full amount of its claim and accrued interest up to the date of, I think, the bankruptcy order.  The total of the proof of debt was some HK$77,000, representing some HK$71,000 principal and approximately HK$6,000 in interest. 

5.  Few assets were recovered in the bankruptcy, with only $61,000 worth of assets being recovered for distribution to the creditors, leaving aside the Property.  On the basis of those recoveries, a dividend of 1.6 per cent was paid to the creditors whose proofs were admitted, which included KBC.  That dividend was paid on 21 January 1991 and KBC received a total of HK$772.20 by way of dividend in respect of its proof of debt. 

6.  Shortly afterwards, on 8 March 1991, the Bankrupt died.  Despite being discharged from his trusteeship, the Official Receiver continued and continues to administer the Bankrupt’s estate insofar as it is still necessary to do so.  As a result, during the course of 2004, the Official Receiver made attempts to sell the Property and had, at that time, received an offer for the purchase of the Property from an intending purchaser.  In the course of dealing with the proposed sale which does not, in the event, appear to have gone through, the Official Receiver came to realise that KBC in fact had a charging order over the Property. 

7.  On discovering this, the Official Receiver wrote to BOC – which was by then the successor corporation to KBC – on 4 June 2004.  The Official Receiver’s letter was addressed to BOC, referred to the bankruptcy by its case number and the identity of the debtor (the Bankrupt) and also referred to the Property.  The letter stated:

“We are in receipt of an offer to purchase the captioned property. According to the land search records, you, formerly known as Kincheng Banking Corporation, have registered a sealed copy of charging order absolute against that property. Nevertheless, you did file proof of debt with this office. Unless you consider otherwise and inform us accordingly, we shall regard you have surrendered your security to the Official Receiver pursuant to section 5A of the Proof of Debts Rules of Cap. 6 for the general benefit of the creditors. Please let us have your confirmation in writing at your earliest convenience.”

8.  It appears that there was some then communication between the BOC and the Official Receiver’s Office from which it would seem that BOC indicated to the Official Receiver’s Office that it did not in fact have any documentation in its records that could be located in relation to the bankruptcy or the Property.  As a result, on 25 June 2004, a member of the Official Receiver’s Office sent a fax to BOC enclosing a copy of the proof of debt that had been filed by KBC in 1990 for its reference.  Having received that information, BOC eventually responded, on 12 July 2004.  The relevant part of the letter is as follows:

“We write to confirm that we will not enforce the charging order against the captioned property and the total amount of indebtedness is still due and owing and has not been paid by the captioned defendant.”

9.  Following that exchange of correspondence, nothing further appears to have happened until 2011.  In about January 2011, BOC, possibly in the course of reviewing its records, appears to have come to the realisation that this charging order was still in existence, that the debt under it had still not been fully recovered, and therefore gave instructions for the charging order to be re-registered against the Property. This was done on 18 January 2011.

10.  Towards the end of 2011, the Official Receiver, perhaps having become aware of the re-registration, wrote to BOC on 7 December 2011 to reiterate that, as far as the Official Receiver was concerned, BOC had surrendered the security to the bankruptcy estate in exchange for receiving a dividend in the bankruptcy and that the Official Receiver regarded himself as free to deal with the Property as part of the bankruptcy estate.  It was no doubt this letter that resulted in the present application being made. 

11.  The present application is supported by two affirmations from an officer of BOC, a Mr Lee Wai-ho.  Mr Lee was not involved in these matters at any previous time and he readily acknowledges this, indicating that he relies on his general knowledge of banking practice and, in particular, the practices of BOC, and on the documentation that he has had available to him, which is fairly limited, in making the affirmations that he has done in support of the application.

12.  Before I consider the merits of the application, it is perhaps relevant to identify the relevant provisions of the Bankruptcy Ordinance, in this case, the subsidiary legislation under the Proof of Debt Rules, that govern this application.  At the time that the proof of debt was lodged in October 1990, the relevant form of the rules was the Proof of Debt Rules 1932, which set out the requirements that had to be met in relation to proofs of debt lodged in bankruptcy.  At the time, the proof of debt had to be by way of affidavit and the relevant rule, Rule 5, was in the following terms:

“The affidavit shall state whether the creditor is or is not a secured creditor and if it is found at any time that the affidavit made by or on behalf of the secured creditor has omitted to state that he is a secured creditor, the secured creditor shall surrender his security to the Official Receiver or Trustee for the general benefit of the creditors, unless the court, on application, is satisfied that the omission has arisen from inadvertence and, in that case, the court may allow the affidavit to be amended upon such terms as to the repayment of dividends or otherwise as the court may consider just.”

13.  Shortly after the proof of debt was lodged in 1992, the Proof of Debt Rules were amended and the relevant provisions were slightly altered although not so as to change the legal test to be applied when considering whether or not the proof of debt should be permitted to be amended.  The Proof of Debt Rules, 1992 version. were brought in by the Proof of Debt Amendment Rules 1992 which substituted Rules 2 to 5 of then existing Proof of Debt Rules by new Rules 2, 3, 4, 5 and 5A. 

14.  The format of the rules was slightly different, in that proofs of debt were no longer required to be made by affidavit but were required to be made in a specified form, with Rule 4 providing for certain matters to be declared in the proof of debt by the person authorised by the creditor to do so.  Included among those matters, at paragraph 4(1)(e), were particulars of any security held, the date when it was given and the value which the creditor put upon it.

15.  Rule 5A provided that:  “if it is found at any time that the proof made by or on behalf of the secured creditor has omitted to state that he is a secured creditor, the secured creditor shall surrender his security to the Official Receiver or, when a Trustee has been appointed, the Trustee, for the general benefit of the creditors unless the court, on application, is satisfied that the omission has arisen from inadvertence, in which case the court may allow the proof to be amended upon such terms as to the repayment of any dividends or otherwise as the court may consider just”. 

16.  It will be seen from the terms of Rule 5 of the 1932 version of the rules and Rule 5A of the 1992 version of the rules that there is no difference at all in terms of the test to be applied by the court in considering any application for amendment.  What is necessary is for the court to be “satisfied that the omission has arisen from inadvertence”. The consequences of being so satisfied are likewise similar, that the court then has discretion to allow the proof to be amended and may allow such amendment on such terms as it may think just, whether relating to repayment of dividends or otherwise.

17.  It is therefore not strictly necessary to come to a view as to which particular set of rules applies. However, since both parties have addressed submissions on that point, I shall express my conclusions on that relatively briefly.  It is common ground that the latest set of Proof of Debt Rules which were introduced in 2007 are not applicable, as the amendment rules by which they were introduced expressly provided a transitional provision by which the new rules were stated not to apply to any case in which the petition had been presented before the rules came into effect.  The difference between the parties is therefore as to whether the 1992 version of the rules or the 1932 version of the rules applied in this case. 

18.  For the Official Receiver, Mr Lam suggested that the relevant rules to consider were the 1992 rules because there was nothing in those rules to suggest that they were not intended to apply to bankruptcy petitions that had already been presented.  In other words, unlike the 2007 amendments to the Proof of Debt Rules, there was no express saving in relation to petitions that had been presented previous to the coming into effect of the new version of the rules.  He therefore suggested that, in those circumstances, the 1992 rules were the relevant version of the rules to apply since they were the version that apply to the present case.  Given that the 2007 rules do not apply, the latest set of rules applicable was the 1992 rules, which should apply to this application as it was made after those rules came into effect.

19.  On the other hand, Miss Kwok, for the bank, suggests that the earlier rules, the 1932 rules, remain applicable to the proof of debt in this case because the proof was made prior to the 1992 rules coming in and was made in the form required by the 1932 rules, ie, by affidavit.  She suggests that this approach would also accord with section 23B of the Interpretation and General Clauses Ordinance which provides that where an ordinance repeals, in whole or in part, any other ordinance, the repeal shall not affect the previous operation of any ordinance so repealed or anything duly done or suffered under any ordinance so repealed.  Miss Kwok suggests that the lodging of the proof of debt was duly done under the earlier version of the rules and that was not affected and that, similarly, the question of whether or not a proof of debt so lodged should be amended should be similarly governed by the earlier set of rules. 

20.  Although I do not find that section 23B is of particular assistance in considering this matter, I do think that, on balance, it is the 1932 rules which should govern the situation since one is here dealing with a proof of debt that was lodged under those rules in a form applicable under those rules and not in a form applicable under the 1992 rules.  However, as I say, nothing in this case actually turns on that point. 

21.  Turning then to the key question, which is whether or not the court can be satisfied that the omission to state the security has arisen from inadvertence, Miss Kwok relies on a number of factors to suggest that the omission to refer to the security in this case was indeed inadvertent.  As I have observed, the bank is not able to put forward any evidence from any person directly involved with the matter.  The evidence of Mr Lee is given on the basis of his position in the bank but, as I have noted, he readily accepts that he does not have personal knowledge of the matters with which we are concerned. 

22.  The points that were made in support of the suggestion that the failure to state the security was inadvertent were as follows.  First, Mr Lee stated, and Miss Kwok submitted, that it was extremely unlikely that any bank would give up security in the form of a charging order which provides a better security for the bank in respect of debts owed to it, so as to prove as an unsecured creditor in a bankruptcy.  In general, Miss Kwok submitted, a bank would be better protected by a charging order or other form of security and therefore it would be very rare for the bank to give up such security without very careful consideration. 

23.  She pointed also to the fact that the purpose of the charging order was undoubtedly to secure repayment of the debt secured by it.  The debt itself was a small amount and was fully secured by the charging order since the value of the Property far exceeded the value of the debt.  In those circumstances, Miss Kwok submitted, it was even more unlikely that the bank would have consciously and deliberately chosen to give up its security.  The charging order was also the only encumbrance on the debt.  It was not therefore a case in which the charging order would rank behind other securities already created over the same Property.  It was therefore likely that full recovery would be possible out of the security. 

24.  Further, according to Mr Lee, the usual practice of BOC is to document and record decisions to give up security, particularly since they are quite unusual, and Mr Lee relied on the fact that, in this case, the records of BOC did not disclose the existence of any documents recording such a decision.

25.  Finally, Miss Kwok relied on the fact that there was a lapse of four years between the charging order being obtained and the proof of debt being affirmed and suggested that, in those circumstances, particularly as the affidavit in support of the proof of debt was made by a clerk of KBC, that it was likely that the security had simply been overlooked when the proof of debt came to be submitted.

26.  Miss Kwok suggested that, taking all these matters into account, the court could readily conclude that no creditor, acting commercially, was likely to voluntarily give up a security of such a nature and, in those circumstances, she submitted that the court should be satisfied, on a balance of probabilities, that the failure to state the existence of the security in the proof of debt lodged by KBC had indeed arisen from inadvertence.

27.  Mr Lam, for the Official Receiver, disputed this.  He suggested, first, that there could well be cases in which a bank might decide to give up its security.  He drew attention to some situations in which this might be sensible.  He suggested that, for example, a bank might choose to give up its security and simply prove in the bankruptcy where it appeared to be the case that there would be sufficient assets in the bankruptcy estate to enable all creditors to be paid in full.  He also suggested that there might be cases in which the costs of realising the security might exceed the likely value of the security so that the bank would be unable to recover even its costs of realisation out of the security, leave alone the debt secured by it. 

28.  I would accept that these may be cases in which it would be sensible for a bank to give up its security.  However, neither of these appears to be the position in this case.  The position here is that the debt appears to have been fully secured by the security and there is no suggestion that the costs of realisation would exceed the value of the security.  As I have indicated, the amount of the debt involved was only some HK$77,000. The security, I am told, is now worth some HK$1.5 million and in those circumstances, although there is no valuation of the security as at 1990 or thereafter, it nonetheless seems likely that the value of the security at any material time would have been likely to exceed not just the amount of the debt but the amount of the costs that might have been incurred in realising it. 

29.  Similarly, in the present case, it is apparent that the assets of the Bankrupt were insufficient to meet the total amount of the claims against his estate.  A dividend of only 1.6 per cent was declared.  Even with the value of the security factored in, the position is that as at today’s values, the value of the security is slightly more than the total amount of the debts admitted to proof.  That position may not have obtained a few years ago or as long ago as 1990.  I do not think that the court can be satisfied in those circumstances that this is a case in which it might have been sensible for a creditor to give up its security.

30.  Mr Lam also suggested that it was necessary for the creditor to affirmatively show that what was in fact intended was to value the security and proof of the balance or, alternatively, to stand on the security and rely on it for recovery of the amounts due.  With respect, it does not seem to me that that is the correct approach.  It does seem to me that it will generally be difficult to show affirmatively that a bank had one of these two intentions in mind.  It will generally be, I think, a matter of inference from all the facts as to whether or not a failure to disclose a security arose as a matter of inadvertence.  Where the court is satisfied from all the material available to it that the likelihood is that the existence of the security was not present to the mind of the person making the affirmation or lodging the proof of debt, the court will generally be ready to accept that there has been a failure to state a security by way of inadvertence.

31.  I would accept, therefore, that in most cases, even in the absence of direct evidence, a court will generally accept a suggestion that a failure to identify and state a security in a proof of debt will have been as a result of inadvertence so long as there is no reason to think otherwise.  Here, however, it does seem to me that there is reason to think otherwise.  This arises principally as a result of the correspondence in 2004 to which I have referred in some detail earlier in my judgment.  It does appear to me that the only sensible reading of the correspondence in 2004 is that it displays a decision by BOC to give up its security and not to rely on it for the purposes of recovering its debt as against the Bankrupt. 

32.  The position was put squarely by the Official Receiver in his letter of 4 June 2004.  In that letter, the Official Receiver specifically drew attention to the fact that there was a charging order in respect of the Property, that the security had not been disclosed in the proof of debt and that the consequence was that the creditor, BOC (then KBC), would be deemed to have given up its security.  The letter expressly invited the creditor to inform the Official Receiver if this was not the case. This can only be read sensibly as an invitation to BOC to confirm its position or, otherwise, to take such steps as it may think appropriate to rectify the position.

33.  The end result was a letter from BOC that stated in clear terms that it did not intend to enforce its security.  It stated:  “We will not enforce the security”.  Although Mr Lee, in his affirmation, sought to suggest that what was meant by this was that it was BOC’s intention not to enforce the security at that stage or at that time, I am afraid that I do not think that that construction or that gloss is one that is capable of being placed on the letter.  The letter is in unequivocal terms.  It clearly demonstrates an intention on the part of BOC not to rely on its security.  It was not qualified in any way and certainly not in the way suggested by Mr Lee.  In those circumstances, it does seem to me that the letter provides strong evidence not just of BOC’s position in 2004, but that it was always KBC’s and BOC’s position in relation to this security that it did not wish to rely on it and was prepared to give it up. 

34.  In addition, I should also note that Miss Kwok submitted that because of the long lapse between 1990 when the proof of debt was lodged and 2004 when this correspondence arose, the correspondence should not be regarded as being of any particular relevance to the position as at the time the proof of debt was made.  With respect, I do not agree with this.  The correspondence clearly suggests that there was a decision by KBC to give up its security, a decision which is entirely consistent with the proof of debt in the form that it was lodged. 

35.  Nor do I think that the absence of documentation, another matter that is relied upon by Mr Lee in his affirmation and by Miss Kwok in her submissions, is of any great assistance to BOC.  There are two reasons for this.  First, as Mr Lam for the Official Receiver submitted, the practice would appear to be the practice of BOC and cannot therefore be regarded necessarily as being the practice of KBC, as to which no banking officer who was with KBC at the relevant time has come forward to give evidence. 

36.  Secondly and, in my view, more importantly, it appears quite clear from the circumstances of the 2004 correspondence, when it was necessary for the Official Receiver to send to BOC copies of relevant documentation, that KBC’s records simply were not preserved.  In those circumstances, it does not seem to me to be possible or appropriate to speculate as to what might or might not have been in those records and it is not possible to infer from the absence of such records that there was no decision to give up the security.  It is equally possible that there had been such a decision, that it had been documented but that the documents had subsequently been lost.

37.  In those circumstances, I do not think that it can be said that BOC has demonstrated, on a balance of probabilities, that there had been no decision to give up the security and that, as such, the lodging of the proof of debt in the form that it was arose as a matter of inadvertence.

38.  Finally, it does not seem to me that the re-registration of the charging order well after its validity had expired is of any assistance to BOC.  The re-registration took place in January 2011.  This was well after the event both in terms of the date of the proof of debt and in terms of the 2004 correspondence and can  at best show that BOC may, on reflection, have changed its mind about its position after thinking about it more recently.

39.  In the circumstances, I am afraid that I cannot be satisfied that the omission to state the security in the proof of debt was inadvertent and I therefore dismiss the application.

40.  I should perhaps also mention that there were a number of other points raised in the skeleton submissions relating to the effect of re-registration and as to the question of what should be done about interest, but neither of those matters arise in the event, having regard to the view that I have come to as to the substance of the application and I do not propose to express any views on those matters.

(Submissions on costs)

41.  I think costs should follow the event. Miss Kwok very properly does not suggest otherwise.  Mr Lam has asked for the costs to be assessed on a gross sum basis.  He has put forward a statement suggesting that the costs amount to some HK$33,419, but has indicated also that he would be content with a gross sum assessment in the amount of HK$30,000 which Miss Kwok is willing to accept. 

42.  In the circumstances, the order as to costs will be that the costs of this application are to be paid by the applicant to the Official Receiver, such costs being assessed in the gross sum of HK$30,000.