RE CHAN SIK CHUNG LHAMSHIRMAN

HCB 8969/2016

[2019] HKCFI 2868

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 8969 OF 2016

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DECISION

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1.  This is an application by the bankrupt (“the Bankrupt”) to reverse the decision of the Official Receiver as the trustee in bankruptcy refusing to give consent or assign the right of action to him to proceed with the legal proceedings in DCMP 3168/2013 where he is a defendant in his personal capacity[1] and in his capacity as the personal representative of the estate of his late father (“the Deceased”)[2].

Background

2.  A bankruptcy order was made against the Bankrupt on 3 February 2017 upon a creditor’s petition.  The Official Receiver became the trustee of his estate in bankruptcy (“the ORT”).

3.  DCMP 3168/2013 is an action commenced by the ex-wife of the Bankrupt in respect of a residential property[3]. She claims as the registered owner of the property and seeks to recover possession of the property from its occupiers.  The named defendants are the sister of the Bankrupt, with the Official Solicitor acting as her guardian ad litem, and the Bankrupt in his personal capacity as well as him in the capacity of personal representative of his late father’s estate.  The Bankrupt’s major contention is that the property always belonged to his late father and now belong to his father’s estate beneficially.

4.  It is trite that the property of a bankrupt becomes vested in the Official Receiver upon the making of the bankruptcy order: see section 58(1) of the Ordinance.  That includes chose in action and right of action: section 53(4) of the Ordinance.  For ascertaining whether the Bankrupt’s right of action in DCMP 3168/2013 is so vested in the ORT, the ORT conducted investigation.  After consideration, the ORT informed the Bankrupt of her following conclusion by letter dated 16 July 2018:

(1) The Bankrupt’s right of action in respect of his interests as a beneficiary in the estate of his late father has vested in ORT, and having considered the information and documents the Bankrupt provided, the ORT was not satisfied with the merits of the Bankrupt’s case and therefore would not assign the right of action in respect of his interests as a beneficiary in the estate of the Deceased to the Bankrupt.

(2) The Bankrupt’s right of action as the personal representative of the estate of his late father and the right of other beneficiaries in the estate were not affected and the ORT would not prohibit the Bankrupt from continuing with the DCMP Action in his capacity as the personal representative of the estate.

5.  The above conclusion of the ORT was communicated to the solicitors acting for the plaintiff in DCMP 3168/2013.  Upon their request, the ORT revisited and reviewed her decision.  By letter dated 4 June 2019, the ORT informed the Bankrupt that she has revised her previous decision.  She also suggested the Bankrupt to be replaced by another as the personal representative of his late father’s estate.

6.  By summons filed on 31 July 2019, the Bankrupt took out the present application pursuant to section 83 of the Bankruptcy Ordinance, Cap 6 (“the Ordinance”).  He has the following grounds of complaint about the decision of the ORT:

(1) The change of stance of the ORT is unreasonable.

(2) The Bankrupt has demonstrated the merits of his case in DCMP 3168/2013.

7.  On 17 October 2019, the ORT filed her report in respect of this matter.

8.  When the present application was heard on 24 October 2019, the Bankrupt suggested that even after the interpreter had explained the content, the written submission of the ORT was still beyond his understanding.  He asked for time and Chinese translation of the ORT’s submission.  Considering the legal analysis of the ORT, which, even if interpreted on site, might appear alien to the Bankrupt, I granted the indulgence to the Bankrupt and adjourned the matter.  Hence the present hearing.  Pursuant to my direction, the Bankrupt has also obtained from the ORT a Chinese translation of her submission.

9.  When the hearing resumed on 20 November 2019, the Bankrupt complained about late provision of the Chinese translation of the ORT’s submission. However, it was still more than a week prior to the hearing, even assuming what the Bankrupt complained about is true.

Discussion

10.  Section 83 of the Ordinance provides:

“If the bankrupt of any of the creditors or any other person is aggrieved by any act or decision of the trustee, he may apply to the court, and the court may confirm, reverse or modify the act or decision complained of, and make such order in the premises as it thinks just.”

11.  It is well established that it would be inappropriate and unjust for the court to interfere with the decision of the trustee unless it is shown that the trustee’s decision was perverse or clearly wrong.  Unless the trustee’s act was utterly unreasonable and absurd, and that no reasonable trustee would have acted so, the court would not interfere: see Re Chung Kau, HCB 581/2003 (23 February 2004) at §13; Wan Po Jun Mary Pauline v Au Yeung Yee Man, HCB 144/2011 (26 February 2013) at §8.

12.  In the context of the present case, the question to answer is whether the ORT’s (i) change of stance and (ii) her refusal to give consent to the Bankrupt to proceed with the DCMP 3168/2013 in his capacity as the personal representative of his late father’s estate or to assign the right of action in those proceedings to him were perverse or clearly wrong, or so utterly unreasonable and absurd, that no reasonable trustee would have come to the same decision.

13.  In proper discharge of her duties, the fact that the ORT reviewed her decision and concluded to change her position per se could not be described as perverse and clearly wrong or utterly unreasonable and absurd. The Bankrupt’s criticism that the ORT did so only under the pressure of the plaintiff’s solicitors in DCMP 3168/2013 is unfounded.  Instead, it is the basis of the ORT’s change that matters for the present purpose.

14.  Whether or not the Bankrupt has the capacity to continue pursuing the proceedings in DCMP 3168/2013 in his capacity as the personal representative of his father’s estate, notwithstanding his bankruptcy, is a question of law.  Before turning to the legal analysis of the ORT, I should set out how section 43 of the Bankruptcy Ordinance, Cap 6 defines the bankrupt’s estate:

“(1) Subject to this section and sections 43A to 43E, a bankrupt’s estate comprises –

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

(b) any property which by virtue of any of the provisions of this Ordinance is comprised in that estate or is treated as falling within paragraph (a).

(2) …

(3) Subsection (1) does not apply to property held by the bankrupt on trust for any other person.

…” (underline added)

15.  The ORT explained the change of her conclusion in her report:

“14. In order to arrive at the Initial Decision, the ORT has considered In re Leigh’s Will Trust[1970] Ch 277, In re Hemming, Deceased[2009] Ch 313 and Hong Chi Yung v Chung Ngai Kit[2017] HKCU 1610. The ORT’s observations were then as follows:

(a) The right of a residuary legatee is a composite right to have the estate properly administered and to have the residue (if any) paid to him as and when the administration is complete. That composite right is a chose in action, which is transmissible, and accordingly falls within the definition of “property” under the Ordinance.

(b) On the bankruptcy of a beneficiary of a residuary estate, the right of action as a beneficiary vest in the trustee in bankruptcy and that right includes the right to have the assets comprised in the residuary estate paid over to him at the end of the administration of the estate.

(c) If a bankrupt is involved in legal proceedings in his capacity as the sole personal representative of the estate, and the bankrupt is also the sole beneficiary, then the trustee in bankruptcy would be in a position to act, ie to decide whether the bankrupt as a personal representative should be assigned the right to proceed with the legal proceedings.

15. The Bankrupt is not the sole beneficiary of the estate of the Deceased. The Deceased died intestate and the Bankrupt has other siblings. The ORT took the view that since the Bankrupt as personal representative of the estate of the Deceased also looks after the interests of the other beneficiaries, the Bankrupt as one of the beneficiaries (whose interests have vested in the ORT) cannot dominate the conduct of the Bankrupt as personal representative of the estate of the Deceased generally. In the light of the observations set out in paragraphs 14(a) to (c) of this report, the ORT arrived at the Initial Decision, ie the right of the Bankrupt as the 4^th Defendant in his capacity as the personal representative of the estate of the Deceased was personal to the Bankrupt and he could continue with the DCMP Action in his personal capacity as the personal representative of the estate of the Deceased.

16. The Initial Decision was communicated to the Bankrupt by the ORT in her letter dated 16 July 2018 … and to Messrs Annie Leung & Co by her letter dated 12 July 2018….

17. Upon being urged by Messrs Annie Leung & Co to re-consider the Initial Decision, the ORT undertook a review of the Initial Decision and further legal research on the issue was conducted in May 2019.

18. The ORT has considered the following to arrive at the Decision:

(a) On the effect of section 44 of the Bankruptcy Act 1883 (the then equivalence of section 43(3) of the Ordinance), the ORT considered the case of The Governors of St. Thomas’s Hospital v Richardson[1910] 1 KB 271 at §278-279 which ruled as follows:

“… it is that property held by the bankrupt does not go to form part of his divisible estate, if and so far as he holds it in trust for another person. But as far as the bankrupt has a beneficial interest in property it passes to his trustee to form part of his divisible estate, and this none the less because the balance of the property is held by the bankrupt in trust for others”.

(b) In Halsbury’s Law of Hong Kong, §45.293, the author wrote as follows:

“…if he holds the property on trust both for himself and for other persons, then the beneficial interest which he has in that property is divisible among his creditor”.

(c) The paragraph quoted in paragraph 18(b) above was annotated by the following footnote 4 which further explains as follows:

“It is doubtful whether, in cases where the bankrupt has a beneficial interest and is also a trustee, the legal estate does not pass. Where there is an express trust, it seems that the legal estate does not pass; but where the trust is an implied or constructive one, the legal estate may pass to the trustee-in-bankruptcy, who will hold it as trustee for the creditors and the other persons interested …”.

(d) In the Law of Insolvency, Ian Fletcher, 5^th Ed, §8.057, the author wrote as follows:

“… it is essential that the bankrupt should be merely a “bare” trustee of any property if it is to escape transmission to his trustee in bankruptcy; if in addition to being trustee, the bankrupt enjoys a beneficial interest in the trust estate, the property does not come within the exemption created by s 283(3)(a), which relates to property held on trust for ‘any other person’”.

Section 283 of the Insolvency Act 1986 is the equivalence of section 43(3) of the Ordinance.

(e) In Hong Chi Yung v Chung Ngai Kit(supra), the Court of Appeal held at §18 as follows:

“…原告人的大律師在庭審前引述了Ian Fletcher 的著作The Law of Insolvency (3^rd ed) 第 8-037 段，和 Williams and Muir Hunter on Bankruptcy (19^th ed) 第263頁。在前述的著作，作者闡明了英國現時法例的相關條文 (相等於香港的《破產條例》第43(3) 條) ：倘若破產人作為信託人持有的物業不歸屬破產受託人，破產人就必須是一個被動受託人 (bare trustee) ，在物業沒有擁有任何實益權益，如果他在信託資產擁有實益權益，該物業就不受相關條文豁免，因為物業並非是以信託形式為「任何其他人」持有的財產。作者在註腳40 引述的支持案例，除了The Governors of St Thomas’s Hospital v Richardson ，還有Morgan v Swansea Urban Sanitary Authority (1878) 9 Ch D 582 第585頁”.

(f) There appears to be no reported case or authority directly on the issue whether the right of action of a bankrupt vests in his trustee in bankruptcy where he has a beneficial interest and is also a personal representative of the estate of a deceased.

19. The Bankrupt as the 4^th defendant in the DCMP Action is acting in his capacity as personal representative in trust for himself (to which he also has a beneficial interest) as well as for other beneficiaries of the estate of the Deceased. The Bankrupt is therefore not a “bare trustee” to the estate of the Deceased to which the exemption under section 43(3) of the Ordinance applies. Having duly considered the further legal research conducted by the [ORT], she concluded that the Bankrupt’s right as the 4^th Defendant in the DCMP Action in his capacity as personal representative of the estate of the Deceased has become vested in the ORT pursuant to section 58 of the Ordinance. The Decision was communicated to the Bankrupt by the ORT in her letter dated 4 June 2019 … and to Messrs. Annie Leung & Co by the ORT in her letter also dated 4 June 2019. A copy of the letter dated 4 June 2019 from the ORT to Messrs Annie Leung & Co….”

16.  Understandably, the Bankrupt, acting in person, made no submission to suggest any contrary legal analysis.  However, in my view, the ORT’s analysis is correct, which has the support of the Court of Appeal’s explanation of section 43(3) of the Bankruptcy Ordinance (cited above) in §§14-18 of their decision in the Hong Chi Yung case.  In DCMP 3168/2013, the dispute concerns the beneficial interest in the property.  If the Bankrupt’s contention is true, so that the beneficial interest in the property belonged to his father and now belongs to his father’s estate, then the Bankrupt as the personal of the estate of his father would be holding such interest for himself and the other beneficiary(ies), not just for “any other person” as excepted under section 43(3).

17.  This brings us to the basis on which the ORT, with the Bankrupt’s right of action vested in her, decided to refuse to consent or to assign the right to the Bankrupt to proceed in DCMP 3168/2013.

18.  The principles are also trite.  It is prudent for the trustee in bankruptcy not to proceed or give consent to a bankrupt to proceed with an action in her name, unless she is satisfied that the action is meritorious and there is sufficient funding or indemnity to cover costs, including potential adverse costs in the event that the claim in the action fails: see Dr Vincent Kay Lo Ip v Dr Andrew Kee Suan Koh, FAMV 8/2001 (24 April 2001).

19.  Insofar as the merits of his case in DCMP 3168/2013 is concerned, the Bankrupt has solicited a legal opinion of Mr Edward Chan, barrister and lecturer of the University of Hong Kong, dated 14 May 2018.

20.  In her report (at §23), the ORT set out in detail her consideration of the evidence and merits of the Bankrupt’s case in DCMP 3168/2013, including the legal opinion obtained by the Bankrupt mentioned above.  she pointed out various inconsistencies, but amongst others, reported as follows:

“…

(e) As pointed out by Mr Edward Chan in paragraphs 14 to 16 of the Opinion, the Bankrupt has the burden to prove that the Plaintiff is only a trustee of the Premises. While Mr Edward Chan has referred to 6 pages of evidence the Bankrupt has, including the receipt of HK$20,500, the pay-in slips and the receipts of certain outgoings of the Premises, no overall assessment of the Bankrupt’s case has been conducted. There is no information on who the witnesses for the Bankrupt would be apart from himself and what they would say, how the Bankrupt learned about the existence and the terms of the “trust” arrangements, how the Bankrupt knew the Deceased was the payer under the pay-in slips and how credible the Bankrupt’s evidence is, etc.

(f) At the outset of the Opinion, Mr Edward said that the Bankrupt “has a reasonably rational defence and counterclaim” and he concluded at the end of the Opinion in paragraph 28 that the Bankrupt’s case “should be re-assessed after (the Plaintiff) has filed her witness statement”. Before such re-assessment, it is Mr Edward Chan’s view that the Bankrupt’s case “can at least be described as tenable and believable”. The ORT took the view that a case with “a reasonably rational defence” or “tenable and believable” is far from being a case that is meritorious.”

21.  The ORT further noted that the Bankrupt’s application for legal aid in DCMP 3168/2013 has been refused, and therefore there is insufficient funding in the Bankrupt’s estate to cover the ORT’s costs and any adverse costs order that the Bankrupt may be exposed to if his case fails.

22.  For the purpose of this application, it is not for this court to substitute its own assessment of the merits of the Bankrupt’s case.  What matters is whether there is basis for the ORT to come to her view, and whether such assessment is perverse or clearly wrong, or utterly unreasonable and absurd, so that no reasonable trustee would have shared it.  All materials considered, I am not so satisfied that the assessment and conclusion of the ORT was perverse.

23.  As to the financial viability of the Bankrupt in funding or indemnifying the costs that the ORT would be exposed to in the proceedings in DCMP 3168/2013, there is nothing to contradict the ORT’s assessment.  The ORT came to her conclusion upon nothing less than due consideration of all the materials.

Conclusion and order

24.  In the circumstances, the application is dismissed with costs to the ORT.  The ORT has lodged her statement of costs.  The criticism by the Bankrupt for the hearing bundle prepared by the ORT to assist the court and the presence of her representative at the hearings was unjustified.  I find the costs asked for by the ORT to be reasonable and therefore allow the same in the sum of HK$41,000.  Such costs shall be payable within 14 days.

[The hearings before this court were conducted in punti for the Bankrupt’s benefit.  Interpreter will be arranged to assist the Bankrupt in receiving this decision.]