17 January, 2016
Under the Bankruptcy Ordinance (Cap. 6) (“BO”), a person who has been adjudged bankrupt will be entitled to be discharged from bankruptcy four years after the making of the bankruptcy order, unless it is a second bankruptcy or the period is extended by the Court. The maximum extension is an additional four year period.
Section 30A(10)(a) of the BO provides, however, that in the case of a person who has left Hong Kong before the commencement of the bankruptcy order, the relevant period shall not start to run until he returns to Hong Kong and notifies the trustee of his return.
The Court of Final Appeal in Official Receiver v Zhi Charles, formerly known as Chang Hyun Chi & Anor [2015] HKCU 2614 recently upheld the decision of the Court of Appeal and ruled that section 30A(10)(a) is in fact unconstitutional.
Background
The Respondent was adjudged bankrupt on 20 December 2006, but left Hong Kong to live in the USA before the order was made against him. The Respondent came back to Hong Kong several times between 2006 and 2011 but he did not notify the Trustees of his return. In July 2011, the Trustees applied to the Court for the Respondent to be examined under section 29 of the BO, but he failed to attend the examination and a prohibition order and warrant was issued for his arrest. The Respondent was arrested upon his arrival in Hong Kong on 10 May 2012.
The Respondent challenged the legality of his arrest and sought declarations that (a) the section 29 examination Order could not be enforced against him because he was no longer bankrupt following his automatic discharge on 21 December 2010 upon the expiration of the 4 year period and (b) section 30A(10)(a) is unconstitutional because it interfered with his right to travel.
Test for constitutionality
The Court of Final Appeal laid down the following 2 stage test that must be considered when an issue of constitutionality is raised before the Court:-
- The Court needs to identify a constitutional right and ask whether such a right is engaged. If not, the constitutional challenge fails.
- If a constitutional right is identified, the next question is whether the legislative provision or conduct complained of amounts to an interference with, or restriction of, that right. If the answer to this question is “no”, the challenge fails without further enquiry. If the answer to this question is “yes” and the right is absolute and no infringement or restriction is permitted, there is no need to consider the question of proportionality. However, if the answer to this question is “yes” and the right is not absolute, there is a need to consider proportionality, which involves asking whether the infringement or restriction (i) pursues a legitimate societal aim, (ii) is rationally connected with that legitimate aim and (iii) is no more than necessary to accomplish that legitimate aim.
The constitutional right engaged and common grounds between the parties
In applying this test for constitutionality, the Court of Final Appeal noted the following common grounds existed between the parties:-
- The relevant constitutional right engaged in the present case was “the right to travel” which is contained in Article 31 of the Basic Law (“BL31”) and Article 8(2) of the Hong Kong Bill of Rights (“BOR8(2)”).
- The scope of the right to travel in BL31 and BOR8(2) includes a right to stay away from Hong Kong and section 30A(10)(a) of the BO amounts to an infringement of that right.
- The restriction on the right to travel constituted by section 30A(10)(a) pursues a legitimate aim (i.e. to keep the bankrupt on the trustee’s radar in order to facilitate the effective administration of his estate) and the restriction is rationally connected primarily to the protection of the rights of creditors and also to the public interest in the proper administration of bankrupts’ estates.
Sole question for determination
In light of the above, the Court of Final Appeal resolved that the only question left for determination was whether section 30A(10)(a) is proportionate as being no more than is necessary to protect primarily the rights of creditors.
In determining this point, the Court of Final Appeal considered the case of Official Receiver & Trustee in Bankruptcy of Chan Wing Hing v Chan Wing Hing & Secretary for Justice (2006) 9 HKCFAR 545 where the Court of Final Appeal ruled by majority that section 30A(10)(b)(i) of the BO, which operated to stop a period of bankruptcy running during a period when, after the commencement of the bankruptcy, the bankrupt left Hong Kong without having notified the trustee of his itinerary and where he could be contacted, as unconstitutional because it did not satisfy the proportionality test. In that case, the Court found that apart from section 30A(10)(b)(i), there were other weapons available to the trustee and creditors when faced with a bankrupt’s failure to cooperate (e.g. to object to the discharge of the bankrupt at the expiry of the bankruptcy period). The Court also viewed the sanction under section 30A(10)(b)(i) as a harsh one, because once triggered it operated indiscriminately at all times and irrespective of the circumstances. Accordingly, section 30A(10)(b)(i) was ruled to be unconstitutional.
Counsel for the Official Receiver argued in the present case that the Court of Appeal was wrong to apply the Court’s analysis in Chan Wing Hing to section 30A(10)(a) because it is distinguishable from section 30A(10)(b)(i).
Decision
The Court of Final Appeal dismissed the Official Receiver’s appeal on the basis that section 30A(10)(a) did not satisfy the proportionality test and ruled that it was unconstitutional. In coming to this decision, the Court relied heavily on its decision in Chan Wing Hing and found that:-
- Section 30A(10)(a) operates automatically and without exception in respect of any bankrupt who is already outside Hong Kong on the date when the bankruptcy order is made, and the sanction imposed by the section applies regardless of whether the bankrupt is ready and willing to afford all co-operation to the trustee in the administration of his estate. There may be reasons wholly outside the bankrupt’s control preventing a return to Hong Kong e.g. illness, impecuniosity or incarceration.
- Section 30A(10)(a) does not vest in the Court any discretion to disapply the sanction that arises by reason of a bankrupt’s absence from Hong Kong.
- The Official Receiver failed to show why a materially less rigid scheme would not equally protect the rights of creditors and the public interest.
- There is no material distinction between the operation of sections 30A(10)(a) and 30A(10)(b)(i) to prevent the Court from adopting the reasoning in Chan Wing Hing in the present case.
- Whist the Court recognised the injustice of absconding bankrupts taking advantage of the period of automatic discharge from bankruptcy might be a reason justifying legislative intervention to prevent abuse (citing the present case, where the bankrupt had walked away from HK$255 million of debt and had never co-operated with the trustees), it cannot justify a position which catches all bankrupts outside Hong Kong regardless of the circumstances that lead to their being absent from Hong Kong and unable to return.
Conclusion
The Court of Final Appeal’s decision is an unwelcome one for trustees in bankruptcy as it theoretically provides bankrupts with a “legitimate” method to escape from their duties and liabilities by leaving Hong Kong prior to the making of a bankruptcy order and only returning to Hong Kong after the date of discharge from bankruptcy.
The Bankruptcy (Amendment) Bill 2015, which has now been placed before LegCo, seeks to repeal section 30A(10) by replacing it with a regime pursuant to which the trustee may apply to the Court for a non-commencement order if the bankrupt fails to attend the initial interview or to provide the trustee with information requested. This is a helpful and sensible legislative amendment, but the proposed commencement date for the new regime is 1 November 2016. In the meantime, debtors can “make use” of the Court of Final Appeal’s decision and attempt to avoid their bankruptcy liabilities by leaving Hong Kong before a bankruptcy order is made against them and only returning after the automatic discharge has occurred.
For further information, please contact:
Richard Hudson, Partner, Deacons
richard.hudson@deacons.com.hk
Cathy Wu, Deacons
cathy.wu@deacons.com.hk
