RE CHUNG WAI LING SIMIE

HCB 16025/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY NO. 16025 OF 2003

_________________________

_________________________

_______________

D E C I S I O N

_______________

1. On 11 March 2003, the debtor Ms. Chung Wai Ling Simie ("the Applicant") applied to the Court for an Interim Order pursuant to sections 20 and 20A of the Bankruptcy Ordinance, Cap. 6 ("the Ordinance") on the ground that she would like to make a proposal to her creditors for an individual voluntary arrangement ( "IVA"). On 24 April 2003, an Interim Order was made in respect of her IVA proposal. At the meeting of the creditors held on 22 May 2003, her IVA proposal was approved with modifications.

2. On 26 August 2003, and despite that her IVA is still continuing, the Applicant presented to this Court a petition for her own bankruptcy pursuant to section 3(1)(b) of the Ordinance on the ground that she is unable to pay her debts under section 10 of the Ordinance. According to the Certificate of Default filed by the nominee on 22 October 2003, her IVA was terminated only on 21 October 2003, which was approximately 2 months after the Applicant had presented her petition.

3. At the hearing of the petition on 21 October 2003, and in view of the wordings of section 3(1)(c) of the Ordinance, I gave directions for a hearing to be held to resolve the issue on whether the Applicant could petition for her own bankruptcy whilst her IVA is still in force and has not been terminated.

4. At the adjourned hearing, both Mr. Tse, solicitor for the Applicant, ("Mr. Tse") and Ms. Wong, for the Official Receiver, ("Ms. Wong") argued that the Applicant is entitled to petition for her own bankruptcy despite her IVA has not been terminated. They argued that section 3(1)(c) of the Ordinance has not precluded her from petitioning for her own bankruptcy under the general provision of the Ordinance namely section 3(1)(b).

5. Before I examine the arguments of Mr. Tse and Ms. Wong, I shall set out the relevant sections in the Ordinance which are as follows:-

"3. Who may present a bankruptcy petition

(1) A petition for a bankruptcy order to be made against a debtor may be presented to the court -

(a) by one of the debtor's creditors or jointly by more than one of them;

(b) by the debtor himself;

(c) by the nominee of, or any person (other than the debtor) who is for the time being bound by, a voluntary arrangement proposed by the debtor and approved by his creditors; or

(d) where a criminal bankruptcy order has been made against the debtor, by the Official Petitioner." (emphasis added)

6. Section 20L of the Ordinance further provides as follows:-

"20L. Default in connection with voluntary arrangement

(1) The court shall not make a bankruptcy order on a petition under section 3(1)(c) (nominee of, or person bound by, voluntary arrangement proposed and approved) unless it is satisfied -

(a) that the debtor has failed to comply with his obligations under the voluntary arrangement; or

(b) that information which was false or misleading in any material particular or which contained material omissions -

(i) was contained in any statement of affairs or other document supplied by the debtor under sections 20 to 20K to any person; or

(ii) was otherwise made available by the debtor to his creditors at or in connection with a meeting summoned under those sections; or

(c) that the debtor has failed to do all such things as may for the purposes of the voluntary arrangement have been reasonably required of him by the nominee of the arrangement.

(2) Where a bankruptcy order is made on a petition under section 3(1)(c), any expenses properly incurred as expenses of the administration of the voluntary arrangement in question shall be a first charge on the bankrupt's estate."

7. Section 10 of the Ordinance states:-

"10. Grounds of debtor's petition

(1) A debtor's petition may be presented to the court only on the ground that the debtor is unable to pay his debts.

(2) ......"

8. It is convenient to mention that substantially identical provisions to our section 3 above could be found in section 264(1) of the English Insolvency Act 1986. Section 264(1) provides that a petition for a bankruptcy order against an individual may be presented to the Court by:-

" (a) one or more of the individual's creditors,

(b) the individual himself, and

(c) the supervisor of, or any person (other than the individual), who is for the time being bound by, an IVA proposed by the individual and approved under Part VIII of the Act.

(d) ......" (emphasis added)

9. At the adjourned hearing, Mr. Tse submitted that if the Applicant can show that she is unable to pay her debts, she can always rely on section 3(1)(b) to petition for her own bankruptcy despite the wordings of section 3(1)(c).

10. Mr. Tse agreed that section 3(1)(c) has expressly excluded an IVA debtor to petition for a bankruptcy order because of the use of the words "other than the debtor" in that section. However, he argued that section 3(1)(c) only applies if the debtor has defaulted or failed to comply with the terms of the IVA. According to Mr. Tse, "default" under section 3(1)(c) would include a default or failure on the part of an IVA debtor to realize an IVA asset or failure to perform an undertaking stipulated in the IVA. He stated that the words "other than the debtor" in section 3(1)(c) are intended to disallow an IVA debtor to rely on default of such a nature to petition for his own bankruptcy. Section 3(1)(c) does not apply if the default is due to inability of an IVA debtor to repay his debts. He submitted that if an IVA debtor is unable to repay the debts under the IVA, he is not barred by section 3(1)(c) from presenting his own petition. He is still entitled under the general provision i.e. section 3(1)(b) to petition for his own bankruptcy. Mr. Tse submitted that the issuance of a certificate of non-compliance is not a pre-requisite to the presentation of a debtor's petition under section 3(1)(b).

11. In short, Mr. Tse is trying to make a distinction between default which is not due to inability to repay debts and default which is due to inability to repay debts. If it is the former, the IVA debtor is precluded by section 3(1)(c) to present a petition for his own bankruptcy. If the latter, the IVA debtor is not precluded, he can still petition for his own bankruptcy under section 3(1)(b) despite the IVA is still in force.

12. Mr. Tse further argued that the IVA is an arrangement created by legislation. It is an intervention of the private rights of the creditors. However, he submitted that the approval of an IVA at the creditors' meeting would not change the insolvency status of the debtor. The debtor still remains liable to repay his creditors under the IVA. As such, the debtor should not be deprived of the protection afforded by the general bankruptcy law, that is to petition for his own bankruptcy. Mr. Tse submitted that if it is the intention of the legislature to take away such fundamental right of the debtor to petition for his own bankruptcy, this should be more explicitly stated in the legislation.

13. Ms. Wong for the Official Receiver also agreed that under section 3(1)(c), only the nominee and creditor under an IVA are entitled to petition for bankruptcy to the exclusion of the debtor. However, she submitted that the 2 subsections i.e. section 3(1)(b) and section 3(1)(c) are independent and exclusive to the debtor and nominee/creditor respectively.

14. Ms. Wong submitted that despite the exclusion under section 3(1)(c), an IVA debtor is still entitled to present a petition for his own bankruptcy. This is because section 10(1) of the Ordinance allows a debtor to present a petition on the ground that he is unable to pay his debts. This is independent from section 3(1)(c). Ms. Wong took the view that irrespective of whether a debtor is under an IVA or not, as long as he is unable to repay his debts, he can petition for his own bankruptcy. She submitted that to allow a debtor to petition for his bankruptcy when he is "unable to pay" is only consistent with the spirit of the Bankruptcy Ordinance.

15. In support of her argument, Ms. Wong cited Lawson on Individual Voluntary Arrangements. At para. A19-1, it reads:-

"Notwithstanding the approval of a voluntary arrangement, a bankruptcy order may be made against the debtor in three quite different sets of circumstances. First, there may be a petition based on default. Secondly, a petition may be brought against the debtor by a creditor who either was not bound by the voluntary arrangement or whose debt arose after the voluntary arrangement was approved. Thirdly, the debtor may present his own petition." (emphasis added)

16. As far as the facts of the present case are concerned, Ms. Wong submitted that the IVA proposal itself has indeed provided for and allowed a petition to be presented by the Applicant under section 3(1)(b) of the Ordinance. According to clause 3P(1)(b) of the proposal, it states that if a bankruptcy order is made on the Applicant's petition, it would be treated as a "failure of the IVA" entitling the nominee to convene a meeting to decide whether the Applicant's IVA has failed or if it has, to issue a notice of non-compliance. It further states that should that happens, the Applicant's IVA would terminate forthwith.

17. With respect, I do not agree with the submissions of Mr. Tse and Ms. Wong. In my view, section 3(1)(c) has expressly excluded an IVA debtor to petition for his bankruptcy. The ordinary and natural meaning of section 3(1)(c) is that it allows only the nominee or any person (other than the debtor) who is for the time being bound by the IVA to present a petition for a bankruptcy order. The words "other than the debtor" clearly reflect the intention of the legislature to exclude the debtor from petitioning for his own bankruptcy. Section 3(1)(c) in fact makes no distinction as to whether the IVA debtor is unable to repay the debts or not as Mr. Tse attempts to make. In my judgment, to allow an IVA debtor to petition for his bankruptcy under section 3(1)(b) during the continuation of the IVA would be totally inconsistent with and in direct contradiction to the clear wordings of section 3(1)(c). If the submissions of Mr. Tse and Ms. Wong are correct and the IVA debtor is entitled to petition for his own bankruptcy under section 3(1)(b) and whilst the IVA is still in force, it would make the words "other than the debtor" in section 3(1)(c) otiose and meaningless.

18. I note the arguments of Mr. Tse and Ms. Wong that to preclude an IVA debtor to present a petition under section 3(1)(b) would be against the spirit of the Ordinance and amount to an infringement of the fundamental rights of a debtor. Again, I cannot agree. In my view, the matter has to be looked at in context.

19. The IVA itself is a statutory scheme allowing a debtor to compromise with his creditors with a view to avoiding bankruptcy. It is intended to provide a formal alternative to bankruptcy. Once the IVA proposal is approved, the IVA gives rise to a statutory contract, binding on the debtor and creditors (see Davis v Martin-Skian [1995] BCC 1122 at page 1125). It is to be noted that upon the making of an Interim Order under section 20 of the Ordinance, the fundamental rights of the creditors to present a petition for bankruptcy or to levy execution against the debtor would be stayed or disallowed unless with the leave of the Court. Once the IVA proposal of the debtor has been approved at the meeting of the creditors, the pending bankruptcy proceedings if any, would be deemed to have been dismissed under section 20H of the Ordinance. The creditors are also precluded from presenting a bankruptcy petition unless there are defaults on the part of the IVA debtor as stipulated under section 20L of the Ordinance. In my view, the statutory scheme itself intends to and does alter the respective rights of the debtor and the creditors and that includes, by the unambiguous wordings of section 3(1)(c), taking away the right of the IVA debtor to present a bankruptcy petition under section 3(1)(b).

20. Ms. Wong submitted that under clause 3P(1)(b) of the IVA proposal, the Applicant is implicitly entitled to petition for her own bankruptcy during the continuation of the IVA. My short answer to this is that, such a term is inconsistent with the section 3(1)(c) and is of no effect. The statutory provisions must prevail over the contractual provision if there is any inconsistency.

21. Ms. Wong has further cited a passage in Lawson Individual Voluntary Arrangement (see above) to support her argument. In my view, the learned author is only making a general statement. He has not in fact elaborated on under what circumstances; at what stage of the IVA and for what reason the debtor may present his own petition notwithstanding the approval of a voluntary arrangement. Also, it seems that he has not examined the relationship between section 264(1)(b) and section 264(1)(c), the equivalent sections in England. With respect, I will not place reliance on this general statement of Lawson.

22. In my view, Flether on the Law of Insolvency, 2002 Edn, at p. 130-131, para. 6-077 has succinctly summarized the matter in question. I agree with his observations on the interpretation of our equivalent section i.e. section 264(1)(c) of the English Insolvency Act 1986. They are as follows:-

"... a voluntary arrangement under Part VIII of the Insolvency Act is intended to provide a formal alternative to bankruptcy. Consequently, while such an arrangement is in force and undergoing implementation no person who is bound by it may have recourse to a bankruptcy petition against the debtor. Where, however, the debtor fails to comply with his obligations under the arrangement, or where it can be shown that the debtor has supplied false or misleading information during the course of concluding the arrangement, or where he fails to do all that may be reasonably required of him by the supervisor of the arrangement for the purposes of its implementation, the debtor forfeits the protection from bankruptcy adjudication which the law has thus far afforded him. Section 264(1)(c) of the Act allows a petition for a bankruptcy order to be presented by the supervisor of the voluntary arrangement, or by an person (other than the debtor himself) who is for the time being bound by it but this is subject to the provisions of section 276(1), which requires the court to be satisfied that at least one of the three specified grounds of fault or violation instanced above are established.

Notably, the drafting of section 264(1)(c) precludes the possibility that the debtor himself may present a petition for a bankruptcy order, the underlying logic of this being apparently that it should not be open to a debtor who has induced his creditors to accept his proposal for a voluntary arrangement to render the entire exercise a futility by his own conduct in first defaulting upon his obligations under the arrangement, and thereafter presenting a petition for his own adjudication. This is an important safeguard because the debtor might otherwise occupy a position of considerable tactical strength which he might exploit, in appropriate circumstances, to frustrate the objectives of the voluntary arrangement and thereby to flout the obligations into which he had previously entered with his creditors' approval. Therefore, if a debtor commits default in connection with a voluntary arrangement it is for the supervisor of that arrangement, or any of the creditors who are bound by it, to determine whether the entire arrangement shall be brought to an end, and a bankruptcy order applied for by way of a petition."

23. In conclusion, and for the reasons given above, I am of the view that the Applicant is not entitled to present her own petition for bankruptcy during the continuation of her IVA. I dismiss the petition.

24. On the question of costs of the adjourned hearing, I agree with Mr. Tse and Ms. Wong that there should be no order as to costs as it involves a point of construction relating to section 3(1)(c). I am grateful for their assistance.