RE TSUI SHING CHUEN

HCB 1349/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 1349 OF 2010

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BETWEEN

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D E C I S I O N

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1.  This is the adjourned hearing of an application by a former bankrupt, Mr Tsui Shing Chuen (“the debtor”) whose bankruptcy was annulled earlier this year, for the remission of fees that are to be charged by the Official Receiver. The application for remission is made pursuant to section 114(2) of the Bankruptcy Ordinance.

2.  The bankruptcy order in this case was made against the debtor in his absence on 28 April 2010.  The Official Receiver became his provisional trustee in bankruptcy and later his trustee in bankruptcy.

3.  The debtor made a statement of affairs dated 3 September 2010 in which he indicated that he had total assets of some HK$5,693,320.63.  This was on the basis that he had a half or one-third share in certain funds standing to the credit of various bank accounts and also in certain properties.  It also stated that he had a single unsecured creditor, the Bank of China, the petitioner in this case, who was owed some HK$6,567,015.09 and also US$177,888.11, a total in Hong Kong dollar terms of just under HK$8 million.

4.  In fact, two proofs of debt were filed in the bankruptcy.  One was by the Inland Revenue Department for a relatively small sum of HK$6,100, and this was later withdrawn.  The Bank of China approved for two sums in Hong Kong and US dollars respectively:  HK$3,081,197.36, and US$184,478.58.  The reason for the reduction from the amounts stated in the debtor’s statement of affairs was that there had been a partial recovery of the amounts owed from another guarantor who had given the guarantee to the Bank of China in respect of the same debts.

5.  The debtor promptly applied for an annulment of the bankruptcy order on 18 May 2010, just a matter of weeks after the bankruptcy order was made.  The application for annulment first came on for hearing before Mr Justice Chung on 5 October 2010, when the application was adjourned sine die.

6.  At the end of 2011, the Bank of China and the debtor reached a settlement agreement by which the bank agreed to accept HK$3,080,000 in full and final settlement of its claims against the debtor.

7.  On 30 April 2012, the debtor applied to amend his summons seeking an annulment of his bankruptcy to include also an application for remission of the Official Receiver’s fees pursuant to section 114(2) of the ordinance.

8.  The debtor’s restored summons was first heard on 13 June 2012.  At that hearing, the debtor relied only on section 33(1)(b) of the ordinance as a basis for annulment of the order.  The application was thus based on the ground that the provable debts and expenses of the bankruptcy had all been secured and not on the ground under section 33(1)(a) that the bankruptcy order ought never to have been made.

9.  The Official Receiver did not oppose annulment on this basis, and, as I have observed, reliance was not placed on section 33(1)(a).  The annulment order was made at that hearing on 13 June 2012.  The remission application, however, was adjourned to enable the Official Receiver to put in a further breakdown of the time costs involved in this bankruptcy and also because the Official Receiver wished to argue that the decision of the Court of Appeal in Re Suen King Ning - and I will put in the reference later - did not dictate complete remission down to time costs in every case, although in the circumstances of this particular case, the Official Receiver took a neutral stance in relation to the application for remission.

10.  The Official Receiver has, prior to today’s hearing, put in a further explanation of the work done which shows what was done in the context of this bankruptcy.  The Official Receiver indicated that the scale fees chargeable pursuant to the Bankruptcy Fees Rules totalled some HK$804,880.  The Official Receiver also indicated that they had funds in hand of some HK$3,990,270.43 which included a sum of HK$1.4 million provided by the debtor’s wife to enable the settlement sum agreed to be paid to the Bank of China.  The amount previously collected by the Official Receiver from some of the debtor’s joint bank accounts was HK$2,590,270.43.

11.  On the other hand, the Official Receiver’s time costs, as I have indicated, were estimated at around HK$200,000.  The scale fees were calculated as follows:  first, a charge of HK$380,000 under item 1 of table B of the Bankruptcy Fees Rules. That item allows for a charge of 10 per cent to be made on payments made by the Official Receiver into the Official Receiver in Bankruptcy account, whether acting as interim trustee or as trustee to administer a debtor’s or bankrupt’s property.  The amount of HK$380,000 was arrived at on the basis that the Official Receiver would be paying in about HK$3.8 million into the Official Receiver in Bankruptcy account, this being made up of the sums recovered by the Official Receiver from the debtor’s joint bank accounts and the amount to be provided by the debtor’s wife.  This has been referred to as “the realisation fee” in these proceedings, but with respect, perhaps that terminology is a little misleading in that it may not necessarily be the case that all amounts paid into the Official Receiver in Bankruptcy account are necessarily amounts recovered as a result of realisation of assets of the bankrupt.

12.  The second item in respect of scale fees arises under item 3 of table B, and in this case, the amount indicated is HK$154,000.  Item 3 provides for a charge of 5 per cent to be made on amounts distributed as dividend or otherwise by the Official Receiver, and the calculation in this case was on the basis that a dividend of about HK$3,080,000, the settlement account, would be paid to Bank of China by the Official Receiver.  This has been referred to as “the dividend fee”.

13.  Finally, under item 9 of table B, an amount of HK$269,500 is suggested.  Item 9 provides for an ad valorem fee to be payable on the aggregate amount of assets realised and brought to credit in respect of estates in which the Official Receiver acts as trustee when he accounts to the court under section 86(b)(ii) of the ordinance.  A similar ad valorem fee is payable in respect of bankruptcies administered by private trustees in bankruptcy as well.  This fee has been referred to as “the ad valorem fee”.

14.  Mr Chong, who appeared for the debtor, contended that the scale fees were incorrectly calculated or were otherwise unfair in that they appeared to contain elements of double counting or double charging in respect of the same or very similar items.  He went on, however, to contend that even if the amounts were correctly calculated, there should be an order for remission of the Official Receiver’s fees under section 114(2) of the ordinance so as to reduce the amount charged to an amount which would reflect the charges that would have been made had the Official Receiver’s costs in respect of this bankruptcy been charged for on a time cost basis; that is, a remission of fees down to the level of about HK$200,000.

15.  In support of his argument that there should be such an order of remission, Mr Chong relied on the following matters:  one, the debtor’s personal circumstances.  The debtor is elderly.  He is now aged 79 years old.  He is retired, and has, apparently, no income of his own.  The debtor’s wife is bedridden and lives in a nursing home on the mainland.  She has various medical and care expenses which have to be provided for.  Given the debtor’s age, Mr Chong suggested that it was likely that the debtor himself would have medical expenses of his own to deal with in the future.

16.  The debtor’s assets, as disclosed in his statement of affairs, were about 5 or HK$5½ million, but with HK$2½ million of those assets being paid to the Bank of China and also an amount to be paid to the Official Receiver by way of fees, and even on the basis of remission it would be about $200,000 if I were to accede to Mr Chong’s submissions fully, this would mean that approximately half of the debtor’s assets would no longer be available for himself.

17.  This therefore leaves a significantly smaller amount for the debtor to deal with his own expenses and those of his wife.  Admittedly, his wife would appear to have an interest in some assets which may give them a further amount of perhaps about HK$5 million for their future care, but nonetheless on either basis, Mr Chong submitted, a difference of some $600,000 would be significant, representing about 10 per cent of the remaining net assets of the debtor and his wife, or 20 per cent-odd of the net assets of the debtor after the annulment of the bankruptcy.  That difference of $600,000, Mr Chong submitted, was far from insignificant and would certainly serve to ease the financial concerns of the debtor and his wife going forward.

18.  Second, Mr Chong relied on the discrepancy between the actual time costs, if those were the basis of remuneration for the Official Receiver, and the amount of scale fees to be charged.  He suggested that the discrepancy was substantial in that the scale fees amounted to approximately four times the time costs that would have been charged had that been the basis of charging.

19.  Thirdly, Mr Chong relied on the fact that the actual work done by the Official Receiver in this case appeared to be relatively straightforward and not at all difficult.  Apart from the general administrative matters related to the bankruptcy, the only work that had to be done in relation to realisations appears to have been to collect from bank accounts of the debtor funds standing to the credit of those accounts insofar as they belonged to the debtor for the benefit of the bankruptcy estate.

20.  Fourthly, Mr Chong submitted that the debtor in this case had been unaware of the writ against him which led to the judgment debt on which the bankruptcy petition was based, and had been similarly unaware of the statutory demand or the petition, as was evidenced by the making of orders for substituted service in respect of the petition and the fact that the statutory demand was served by way of newspaper advertisement, and also from the fact that the debtor did not in fact appear to contest the proceedings, although it would appear that there were sufficient funds available to enable the debt to the Bank of China to be paid or at least compromised and thereafter paid.

21.  Finally, Mr Chong submitted that there was an element of double charging in respect of similar items, and therefore that there was an element of unfairness as well in that respect in the scale of fees.  Mr Chong also suggested that the Court of Appeal decision in Suen King Ning shows that there is in fact no policy of cross-subsidisation between bankruptcies, which is a point that the Official Receiver had taken in that case, the suggestion being that since the Official Receiver acts as Official Receiver in a large number of bankruptcies, many or perhaps most of which are of a relatively small scale in which there are few assets to be recovered, the objective of providing for scale fees to be charged rather than individual cases being charged on a time costs basis for work done by the Official Receiver, was to enable the Official Receiver to generate sufficient or a fair amount of funds from the work done in what might be termed more substantial or more remunerative or more lucrative bankruptcies so as to offset as far as possible the costs involved in administering bankruptcies in which there were no assets or very few assets for realisation.

22.  Mr Chong also suggested that the Court of Appeal expressed the view that scale fees appeared to be intended to correlate to the amount of work involved.  This appears from paragraph 1928 of the Court of Appeal judgment, where the Court of Appeal suggested that larger estates were likely to be more complex and therefore to involve more work, thus justifying larger scale fees being charged.

23.  Thirdly, Mr Chong suggested that the Court of Appeal had expressed the view that on an annulment, the debtor should be placed back into the position where no order as to bankruptcy had been made against him so far as possible.

24.  Miss Chan, who appeared today for the Official Receiver, not having appeared at the previous hearing on 13 June this year, submitted firstly, in relation to the calculations, that the calculations of the amounts due were in fact correct.  As to remission, she reiterated that the Official Receiver took a neutral stance as to remission in this case, but she did submit that Suen King Ning could perhaps be viewed as having been decided per incuriam since material which her researchers had produced from Hong Kong Hansard appeared to suggest that there may well in fact have been a policy of cross-subsidisation or a policy that the Official Receiver’s fees under the scale fees were intended to be set at a level to enable the overall costs of providing services as trustee in bankruptcy to be recouped without reference to the work done in any particular bankruptcy, and that such material had not been placed before the Court of Appeal in the Suen King Ning case.

25.  She also suggested that there could and should be a difference in approach between annulments under section 33(1)(a) and (b) respectively, with the court being perhaps more ready to grant an order for remission in the former rather than the latter case, because in the latter case there would be no suggestion that the bankruptcy order was wrongly made or should never have been made, whereas in Suen King Ning the case was an unusual one, and the Court of Appeal had pointed out that as the debt was in fact fully secured, notwithstanding that this was not a point taken by the debtor at the hearing at first instance, a bankruptcy order would almost certainly not have been made had this been properly disclosed by the petitioner as it should have been.

26.  I shall deal first with the question of the calculations under the various provisions of table B of the Bankruptcy Fees Rules.

27.  First, in relation to what has been described as the realisation fee, although, as I have observed, it is not actually based on realisations of the assets belonging to the debtor in the strict sense, the provisions simply require this fee to be paid on any amount paid in by the Official Receiver into the Official Receiver in Bankruptcy account.  Section 91(1) of the ordinance requires that all moneys received by the Official Receiver as trustee are to be paid into that account.  In this case, it does appear that both the recoveries from the debtor’s joint accounts and the moneys provided by his wife in order to secure the annulment of the bankruptcy were paid into the account.  There was at the hearing a difference of view as to whether the payment into the Official Receiver in Bankruptcy account had been effected by the Official Receiver, this being the Official Receiver’s position, or by the bankrupt’s wife, this being the position of Mr Chong, who represented Mr Tsui.

28.  There does not, however, appear to be any evidence as to this, and this is not a matter that the court can now determine.  However, I would observe that although the physical act of payment in to the Official Receiver in Bankruptcy account may, if the Official Receiver is mistaken, have been actually effected by the debtor’s wife, the fact remains, and it seems to me that it is likely that that would have been done at the request and instructions of the Official Receiver.  In those circumstances, it seems to me that it would be possible to regard the payment in as having in fact been made by or at least on the directions of the Official Receiver into the Official Receiver in Bankruptcy account.  No reference is made as to the source of such funds in item 1, and it seems to me that whatever the source of such funds, provided that they are paid in to the Official Receiver in Bankruptcy account by the Official Receiver, the 10 per cent fee will be chargeable upon them.

29.  For present purposes, therefore, it does seem to me that the amount proposed by the Official Receiver of HK$380,000-odd would be the appropriate amount chargeable in respect of the fee under item 1 of table B.

30.  Turning to the dividend fee, the debtor suggests that the payment to the Bank of China of the amount of the settlement would have taken place after the annulment and therefore could not have been a dividend.  The Official Receiver says, however, that the Bank of China never at any stage withdrew its proof of debt, and that payment out by the Official Receiver to creditors can only be made by way of a payment of dividend.  See sections 67 and 72 of the ordinance.  The Official Receiver says that in fact, a notice of intended dividend was published after the annulment order on 29 June 2012, and that thereafter, although the Bank of China did not put in a further amended proof of debt, the Official Receiver adjudicated its proof on the basis of a debt of 3.08 million as agreed by the Bank of China, having received confirmation from the Bank of China that it did not seek more than that amount, and that thereafter, payment out was made of the 3.08 million to the Bank of China from the Official Receiver in Bankruptcy account and that this payment was necessarily a dividend, or at any rate, if it was not a dividend, it was nonetheless a sum paid out by the Official Receiver otherwise.

31.  The Official Receiver also suggested that whatever the source of funds for the dividend might have been, the payment was nonetheless a dividend.  It seems to me that this is right, and that in the circumstances, as a dividend of HK$3.08 million has been paid by the Official Receiver to the Bank of China or the sum of HK$154,000 is chargeable under item 3 of table B.  I would observe, however, that insofar as part of the funds for any proposed settlement on which an application for annulment is based are to be provided by third parties or any party other than the debtor, it may well be impossible to avoid paying the relevant fees on the amounts so provided by third parties by structuring the way in which the annulment and settlement process works slightly differently.  For example, it might have been possible to have arranged for the additional amounts necessary to enable the settlement to take place to be paid to solicitors for the debtor or the bank to hold in escrow for payment to the bank directly upon annulment of the bankruptcy, and it may further have been possible for arrangements to be made for the funds standing to the credit of the bankruptcy estate to be released to the debtor’s solicitors, again subject to an undertaking or an escrow arrangement for the appropriate amount to be paid on to the bank, and thereby to have avoided any dividend or other payment being made to the creditor by the Official Receiver, thereby avoiding liability to pay the dividend fee.

32.  Similarly, by keeping funds derived from third parties out of the Official Receiver in Bankruptcy account and not routing them through the Official Receiver for payment to the creditor, the amount payable under the realisation fee might be similarly reduced, and it may be that this is something that practitioners advising on such cases in future may wish to bear in mind.

33.  Finally, so far as the ad valorem fee is concerned, the debtor suggests that there is no evidence that the court has ever directed the Official Receiver to account in respect of this bankruptcy. However, it seems to me that this is not a valid point.  Item 9 applies wherever the Official Receiver accounts to the court under section 86B(2) of the ordinance.  That provision states that:

“The Official Receiver shall account to the court and pay over money and deal with security as the court may from time to time direct.”

It seems to me that the obligation to account is one that is freestanding and is one that has to be dealt with at some point in the process of the Official Receiver’s acting as a trustee in bankruptcy.  Even if it has not, strictly speaking, taken place yet, and one were not to regard the explanations given by the Official Receiver as to what has been done in these proceedings and what has been done with funds received by the Official Receiver in the course of this bankruptcy in the two reports filed by the Official Receiver for the purpose of these proceedings as an account strictly so‑called, it does seem to me that Ms Chan is right in suggesting that at the end of the day, when the Official Receiver seeks to be released as a trustee in respect of this bankruptcy, it will at that stage, if not before, be necessary for the Official Receiver to account to the court in respect of his conduct of the bankruptcy estate.

34.  In those circumstances, even if no account has yet been given to the court, such an account will in due course have to be given, and at that point the ad valorem fee would become payable. It therefore seems to me to be right to make appropriate allowance for this fee in any situation in which it is suggested that the bankruptcy should be annulled.

35.  However, so far as the amount of the ad valorem fee is concerned, there is a further dispute between the debtor and the Official Receiver, and it is this.  The debtor suggests that the fee should be calculated on the basis of the HK$2,590,000-odd recovered by the Official Receiver from the debtor’s joint bank accounts, rather than the $3.8 million in total which has been paid into the Official Receiver in Bankruptcy account.

36.  As to this point, I think that Mr Chong is right and that the 1.4 million paid by the wife should not be taken into account in calculating the ad valorem fee.  The reason for this is that item 9 of table B makes it clear that the fee is payable on assets realised and brought into credit in the course of the bankruptcy, and in my view, assets in that context must mean assets of the bankrupt, and in this case, the $1.4 million would not appear at any stage ever to have been an asset of the bankrupt.  That amount, even if it could properly be termed a realisation, did not derive from any of the debtor’s assets.  Therefore, the amount of this fee should be HK$190,915, rather than the HK$269,500 which has been suggested.

37.  Finally, dealing with Mr Chong’s argument as to unfairness and double charging, I do not think that this is a valid point.  The fees rules expressly provide for the various fees to be charged, and in doing so they expressly provide for the double charging, if that is what it is, that is complained of.  In those circumstances, whether or not one might regard these matters as being in some way unfair, they are expressly authorised to be charged by the ordinance, and as such must be charged when calculating the appropriate amount of fees to which the Official Receiver would be entitled on the basis of the scale fees provided for under the Bankruptcy Fees Rules.

38.  Thus, making allowance for the adjustment to the ad valorem fee which I have held should be made, the amount of fees payable to the Official Receiver on the basis of the scale fees provided for in the Bankruptcy Fees Rules is HK$724,915.  This does not, I think, really affect Mr Chong’s point as to the discrepancy between such fees and the fees that would be charged on the basis of work actually done in the context of his argument as to remission because the reduction is a relatively small one.

39.  I turn therefore to the question of remission.  The court has a discretion to remit all or part of the fees charged or chargeable by the Official Receiver on the application of a bankrupt.  That discretion is, as both parties accept, unfettered, although of course the court will have regard to certain factors when considering how that discretion should be exercised.

40.  Ms Chan submits that the court should, among other things, bear in mind the purpose of sections 114(1) and (3) to (7) of the ordinance and also the circumstances of the particular case, including any particular hardship that may be caused to the debtor by charging scale fees in full and also taking into account the personal circumstances of the debtor and the difference, if there be one, between the level of the scale fees chargeable and the level of fees that would be charged if they were to be calculated on a time cost basis.

41.  Mr Chong submitted that any suggestion that the court should take account of the policy of cross-subsidisation, which Ms Chan suggested was apparent from the rest of section 114 and indeed the fact of scale fees themselves being provided for in the Bankruptcy Fees Rules, was precluded by the decision in Suen King Ning.

42.  So far as that is concerned, I would accept that the Court of Appeal appears to have held that there were both no evidence of any policy of cross-subsidisation and that it could be inferred that fees charged on the scale fee basis were intended to correlate in a rough and ready way to the amount of work done.  That said, however, I do accept that the material that has now been put forward by Ms Chan might well justify reconsideration of those conclusions and of that inference, but it does not seem to me that it can properly be said that the decision of the Court of Appeal was arrived at per incuriam in the strict sense of that expression.  The matters that are suggested that have not been taken into account are not strictly legal authorities or statutes that bear on the question.  They are, I think, more akin to evidence which was not placed before the court.

43.  I therefore think that while there is something to be said for the Official Receiver’s point of view and the Official Receiver’s concerns at the prospect of having to, in effect, conduct a self-taxation in respect of any bankruptcy in which there is an application for remission are valid concerns, it does seem to me that if this point is to be revisited, this will have to be done in the Court of Appeal, and it will have to be done in a case in which the question actually arises for consideration. This case, however, is not, for the reasons which I shall go on to, such a case.

44.  Mr Chong also submitted, as I have noted, that the court should attempt to put the debtor back into the position that he would have been in had no bankruptcy order ever been made.  Ms Chan, however, submitted that there was a difference between an annulment under section 33(1)(a) and one under section 33(1)(b), and that in this case, the annulment being under section 33(1)(b), it was not a situation in which the order was being annulled on the grounds that it ought never have been made, unlike, as I have observed, the Suen King Ning case.

45.  It would appear from the various authorities that Ms Chan has cited to me that there is real force in this submission.  Again, however, it is not necessary to decide this point, although it does seem to me that there may be something to be said for the suggestion that the court should be more inclined to achieve a full remission to the maximum extent possible where a bankruptcy order should never have been made and may be less inclined to do so where the bankrupt has himself suffered a bankruptcy order to be made against him, but as I have said, it is not necessary to decide this in the present case, as I am satisfied that the debtor has in fact shown good grounds for a remission of fees to be ordered in the present case.

46.  Ms Chan accepts that the factors that the court will take into account include hardship to the debtor and the disparity, if any, between the fees under the scales and the time costs.  Here, I am satisfied that if no remission were to be ordered, the debtor would be likely to suffer genuine hardship, having regard to the personal circumstances in which he finds himself, to which I have already referred:  in particular, his age, the state of his health, his need for funds for future health care for both himself and his wife, and the present need for funds for the care of his wife.  The impact of a difference of $520,000 between the scale fees of $720,000 and the fees charged on a time cost basis of $200,000-odd is, in my view, a significant one having regard to the debtor’s personal circumstances.

47.  As to the cost differential itself, even on the slightly reduced basis that I have found, that differential is clearly substantial.  Moreover, the Official Receiver’s work has been quite straightforward, a matter which is confirmed by the breakdown of the work done which has been helpfully supplied to the court.

48.  It seems to me also that the fact that the debtor was unaware of the proceedings leading to the judgment debt and the bankruptcy order is also a factor that the court can legitimately take into account.  Had the debtor been aware of the proceedings against him or the bankruptcy proceedings, it may have been the case that he would have been able to avoid the making of a bankruptcy order altogether by coming to some settlement with the creditor, with the petitioner, or making arrangements for the petitioner to be paid.

49.  In all of the circumstances, therefore, it does seem to me that this is an appropriate case in which a remission of the Official Receiver’s fee should be ordered, and I would accept, having regard particularly to the bankrupt’s personal circumstances, that it would be appropriate to remit the fees to the full extent possible; however, not leaving the Official Receiver out of pocket as to the work actually done.

50.  In this case therefore I think that the amount of $520,000 should be remitted from the Official Receiver’s fees, which I have found to be in the region of HK$720,000-odd, leaving an amount of $204,915 to be retained by the Official Receiver in respect of her costs in respect of this bankruptcy.

(Submissions on costs)

51.  I will order that the costs of these proceedings be paid by the debtor to the Official Receiver to be taxed on a party and party basis if not agreed.

(Further submissions on costs)

52.  In respect of this first part of the bill up to the hearing on 13 June, I think I am prepared to accept the rate of $3,000 for Miss Lam.  As far as professional work is concerned, I think I would allow 3½ hours for Miss Lam.  As far as preparation of documents is concerned, I would allow 6 hours for Miss Lam - that is 9½ - and then 2 hours for preparation for hearing and half an hour for the hearing itself, which comes to a total of 13 hours at $3,000 - HK$39,000.

(Further submissions on costs)

53.  I would also allow $39,000 in respect of this part of the bill, so the total level of the costs would be assessed on a gross sum basis in the amount of HK$78,000.