1 December, 2015
FACV No. 8 of 2015 – Official Receiver v Zhi Charles (formerly known as Chang Hyun Chi and another (date of judgment 5 November 2015)
On 5 November 2015, the Court of Final Appeal held unanimously that s30A(10(a) of the Bankruptcy Ordinance (Cap. 6) was unconstitutional. That section provides that the bankruptcy period does not start to run when a bankrupt leaves Hong Kong before the date of the bankruptcy order unless he returns to Hong Kong and notifies the trustee in bankruptcy of his return.
The effect of the case is significant: If a bankrupt leaves Hong Kong before the date of the bankruptcy order and stays for a sufficiently long time abroad, he is now able to walk away from his debts, and can escape performing any obligations and rendering assistance to his trustee in bankruptcy. As will be explained below, the Government has put forward the Bankruptcy (Amendment) Bill 2015 which will replace s30A(10)(a) and other related provisions.
Background
The bankrupt is a South Korean who had attained permanent residency in Hong Kong. A statutory demand was issued against him based on default judgments arising from claims for fraud and misrepresentation in connection with securities transactions. The bankrupt was not in Hong Kong on the date of the bankruptcy order and he did not notify the trustees of his return on his subsequent visits to Hong Kong. Two creditors have lodged proofs of debt in a total sum exceeding HK$250 million.
Under the present regime, the bankruptcy period of a first time bankrupt is 4 years which can be extended for a maximum period of another 4 years if the Court is satisfied with the trustee’s objection application. The corresponding periods for a repeat bankrupt are 5 years and 3 years respectively.
The trustees in bankruptcy applied for private examinations against the bankrupt more than 4 years after the bankruptcy order was made. As the bankrupt failed to attend those private examinations, a prohibition order and a warrant for his arrest were then issued. When the bankrupt arrived in Hong Kong about 5 years after the date of the bankruptcy order, he was arrested and brought before the Court. Because of the application of s30A(10)(a), his bankruptcy period had never started to run. The bankrupt sought declarations that s30A(10)(a) was unconstitutional.
The Court of First Instance held that the section was constitutional. The Court of Appeal overturned the decision of the Court of First Instance. The Official Receiver appealed to the CFA.
The Chan Wing Hing case
In the case of Official Receiver & Trustee in Bankruptcy of Chan Wing Hing v Chan Wing Hing & Secretary for Justice (2006) 9 HKCFAR 545, the CFA held that S30A(10)(b)(i) was unconstitutional. S30A(10)(b)(i) provides that where a bankrupt has left Hong Kong after the date of the bankruptcy order without notifying the trustee in bankruptcy of his itinerary and contact means, the bankruptcy period will not continue to run during the period of his absence from Hong Kong and until he notifies the trustee of his
return.
The CFA’s decision
It was undisputed that s30A(10)(a) restricts an individual’s right to travel and such restriction is connected primarily to the protection of the rights of creditors. The question for the CFA to determine was whether the section is no more than is necessary to protect primarily the rights of creditors. If so, then the restriction to the right to travel under the section is justified. That was also the same question determined by the CFA in the Chan Wing Hing case.
The CFA (consistent with the majority decision in the Chan Wing Hing case) held that s30A(10)(a) was unconstitutional as it is more than is necessary because:
- It operates automatically on any bankrupt who is already outside Hong Kong on the date of the bankruptcy order irrespective of the reasons for not being present in Hong Kong. There may be wholly innocent reasons, such as illness, impecuniosity and incarceration.
- Unless the bankrupt returns to Hong Kong, the sanction imposed by the section applies even when he is ready and willing to afford all co-operation to the trustee in the administration of his estate.
- There is no discretion vested in the court under the section to disapply the sanction imposed on the bankrupt.
While acknowledging that ruling s30(A)(10)(a) unconstitutional would mean that the bankrupt in this case would be able to walk away from his debts, the CFA explained that the constitutionality of the section is not to be measured on the basis of a just end justifying disproportionate means.
The Bankruptcy (Amendment) Bill 2015
In April 2015, the Government presented the Bankruptcy (Amendment) Bill 2015 to the legislature which will replace the entire s30A(10) by another mechanism. The proposed mechanism allows the trustee to apply to the Court for a non-commencement order where the bankrupt fails to attend the interview or provide information requested by the trustee. The proposed commencement date of the Amendment Bill is 1 November 2016. The Amendment Bill does not affect cases in which bankruptcy orders were made before its commencement date.
For further information, please contact:
Malcolm Kemp, Partner, Stephenson Harwood
malcolm.kemp@shlegal.com
