Case Detail

HCB 9850/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 9850 OF 2002

______________________

BETWEEN

	Fred Lee, trustee of the property of Pang Lai Fai Willy, a bankrupt	Applicant
	And
	Pang Lai Fai Willy	Respondent

______________________

Coram : Before Master Lung in Chambers

Date of Decision (Handed Down) : 13 November 2007

______________________________________

REASONS FOR DECISION

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The application for review

1. By his letter dated 30 October 2007, the trustee takes out this application to review my decisions handed down on 9 October 2007, in which I disallowed his costs from the bankruptcy estate, pursuant to section 98(1) of the Bankruptcy Ordinance.

2. The trustee now asks me to vary my order to the extent that he is not entitled to recover his costs of and occasioned in the hearing for directions before Master Hui on 6 March 2007 only, which was an application for the interim order. In essence, he is asking me to allow his costs for taking out the application and the hearing before me.

Grounds of review

3. His reasons for his application are: (1) the bankrupt had borrowed from the institutions when he was insolvent and that he had made misrepresentation in the application for the loan, which amount to unsatisfactory conduct under section 30A(4) of the Bankruptcy Ordinance; (2) evidence from the bankrupt showed that he had signed the form without confirming all the details in the JCG application form; and (3) in the test case, Judge Kwan ordered that the trustee was not entitled to recover his costs of and occasioned in respect of the hearing before her out of the bankrupt’s estate. Similarly, the order should only disallow his costs of and occasioned in carrying out the investigation into the circumstances in which the alleged misrepresentations were made in the loan application forms.

Guiding principles

4. Costs are in the discretion of the Court and the Court has to take into consideration all the circumstances of the matter before making the order. This is particularly so for the trustee in light of the decisions of Judge Kwan in Lee Fred (Trustee in Bankruptcy of the Property of Leung Chin Yeung) v Leung Chin Yeung & Ors [2007] 1 HKC 164. At page 182I of her judgment, the learned Judge said:

“ It is important to bear in mind that bankruptcy proceedings are not private litigation between individual parties. There is a wider public interest involved in the proper administration of the bankrupt’s estate in accordance with bankruptcy law (Official Receiver & Trustee in Bankruptcy of Chan Wing Hing & Anr v. Chan Wing Hing & Anr., supra. at 700J to 701B). In deciding whether to exercise his statutory power to object to automatic discharge, the trustee has a “quasi-judicial” obligation to discharge and this is performance of a public duty for the public welfare. Hence, if his application to object should turn out to be unsuccessful, unless his decision in making the application is unreasonable in some respect, he should not be responsible to pay the bankrupt’s costs like an ordinary unsuccessful litigant (Re Campbell, ex parte Official Trustee (1987) 72 ALR 251). ”

5. In the above case, the learned Judge ruled that the trustee should not act too readily in deciding to object to automatic discharge and he should not use conditional discharge as leverage for continued contribution to the estate. [183H-184C]

6. The learned Judge disallowed the trustee’s costs from the estate for the reason that the trustee had failed to discharge his quasi-judicial obligation as she said at 191E:

“ It does not appear to me he has properly discharged his quasi-judicial obligation in reaching a decision whether it is appropriate in each case to object to automatic discharge. In these circumstances, I think it would be appropriate to deprive the trustee of his costs from the estates of the bankrupts. I order that the trustee is not entitled to recover his costs of and occasioned in this hearing out of the bankrupt’s estate in each case.”

Grounds considered

7. In response to the grounds (1) and (2), I do not intend to repeat what I had said in paragraphs 15, 16 and 17 of my Decisions handed down on 9 October 2007. Suffice it to say, the trustee had withdrawn his application against the bankrupt. I gave my reason in paragraph 25 of the Decision:

“ It can be seen quite obviously that the trustee in this application has failed to discharged his duties of making proper or reasonable investigations before he took out his application to object the bankrupt’s discharge of bankruptcy. In the circumstances, I followed the decisions of Kwan J. in Leung Chin Yeung’s case mentioned above as I did in Lai Wai Hung’s case and I disallow the trustee’s costs, including the costs for today’s hearing, from the estate.”

8. Judge Kwan referred the consent summons and the joint application for discharge on conditions back to the Master, for him to consider the merits of both applications in each case with the guidance in her judgment. [185F] The trustee appealed and the matter was heard in the Appeal Case No. CACV 32 of 2007. The Court of Appeal has dismissed the trustee’s appeal in its judgment dated 11 October 2007. As the matter had not been finalized, the learned Judge made the order for costs for the hearing before her only.

9. The trustee now invites me to adopt a truncated approach in the assessment of his conducts in the application and only disallow his costs for his failure of making investigations into the issue of misrepresentation. I disagree to adopt this approach. I consider that it is only fair to take a global view of the matter, taking into account of all relevant factors in deciding the issue of costs. Judge Kwan has given her reasons clearly for disallowing the trustee’s costs from the estate. Her main reason is that the trustee has failed to discharge his quasi-judicial obligation, which is the performance of a public duty for the public welfare. [para. 4 supra]

10. It is quite obvious that the trustee did not bother to make any investigations into the matter before making his decision to make out an application to object the bankrupt’s discharge. This, the trustee does not dispute. The bankrupt should be discharged from bankruptcy on 12 September 2006 had there not been the trustee’s application. The trustee had applied for an interim order to prolong the period of bankruptcy of the bankrupt. As a result of the trustee’s application to object the discharge, the bankruptcy order was only discharged on 9 October 2007. The bankrupt has to bear the blemish of bankruptcy 13 months longer. The trustee now tries to argue that although he did not make investigations into the matters before he took out an application to object discharge, there are ultimately some grounds from the materials that he had produced to the court so that he could justifiably take out the application anyway and he should be entitled to his costs from the estate.

11. I do not think that I can accept the trustee’s argument. His conduct is tantamount to charging people without investigation with a hope that there might be some evidence to convict the defendants at the end of the day. Judge Lam in Fred Lee v Liu Man Hoo HCB11719 of 2002, unreported has criticized the trustee for throwing the raw materials to court without proper investigation in his application for objecting discharge. One may ask the rhetorical question whether the trustee was discharging his quasi-judicial obligations under those circumstances. What has he done for the public welfare in this application? He has not assisted this court. On the contrary, he has caused a flood of similar cases to clog the courts’ diaries, causing delay to other court users. He did not withdraw his application after Judge Kwan’s judgment. He only withdrew his application at the hearing on 6 October 2007 before me. He has prolonged the bankruptcy order of the bankrupt unnecessarily. Now he asks for his costs for so doing from the estate. I do not think this court should encourage the trustee to continue to discharge his duties in this fashion. It is only fair to do the opposite.

Conclusion

12. I decline the trustee’s request to vary my costs order. I also disallow the trustee’s costs for this application from the estate.

(K.W. Lung)
Master of the High Court

Messrs Lee & Chow for Applicant

Respondent appear in person

HCB 9850/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 9850 OF 2002

_________________________

BETWEEN

	Fred Lee, trustee of the property of Pang Lai Fai Willy, a bankrupt	Applicant
	And
	Pang Lai Fai Willy	Respondent

_________________________

Coram : Before Master Lung in Court

Date of Hearing : 17 September 2007

Date of Adjourned Hearing : 28 September 2007

Date of Reasons for Decision : 2 October 2007

Date of Handing Down Decision : 9 October 2007

_________________________

REASONS FOR DECISION

_________________________

This hearing

1. This hearing is on the issue of costs between the trustee and the estate pursuant to my order made on 17 September 2007 when the trustee withdrew his application objecting discharge of the bankrupt. The bankrupt asked for no costs against the trustee. I made no order as to costs between the bankrupt and the trustee. As to the question of whether the trustee’s costs for this application should be paid out of the estate, I adjourned the matter to this hearing, giving an opportunity to the trustee to make submissions on this issue.

2. This is a rather unusual course for this court, on its own motion, to take concerning the costs of the trustee in automatic discharge proceedings. I shall now set out the background reasons for so doing. All the following cases are concerning the same trustee as this case.

The background

3. About 18 months ago, the court received a flood of applications whereby the trustee opposed the discharge of the bankrupts under section 30A of the Bankruptcy Ordinance. This is also the background in the judgment paragraph 5 of Lee Fred (Trustee in Bankruptcy of the Property of Leung Chin Yeung) v Leung Chin Yeung & Ors [2007] 1 HKC 164. The usual grounds for opposition were: excessive borrowing before bankruptcy, misrepresentations by the bankrupt in the applications to the financial institutions for loans or credit cards and failing to submit timely the annual financial statement. Many of those cases subsequently came to an agreement to settle the matter by way of conditional discharge of the bankruptcy, the conditions being that the bankrupt would continue to pay monthly contributions to the estate for a certain period of time after the end of 4 years’ bankruptcy period and to pay the costs of the trustee. It was against those conditions that the trustee agreed not to proceed with his application to oppose the discharge of the bankruptcy. Some bankrupts opposed the trustee’s applications, saying that they had been very cooperative with the trustee throughout the whole period of bankruptcy and that they were forced to make more contributions to the estate and to pay the trustee’s costs. For example, see HCB 13452 of 2002. In this case, the trustee has withdrawn his summons against the bankrupt, who insisted to pursue his complaints of, inter alia, the above allegations against the trustee pursuant to section 84 of the Bankruptcy Ordinance. This matter has been adjourned for court’s consideration of transferring it to the Bankruptcy Judge for a hearing.

4. One of those cases went before Madam Justice Kwan on 20 December 2006 and the judgment was delivered on 9 January 2007. This case was reported as Lee Fred (Trustee in Bankruptcy of the Property of Leung Chin Yeung) v Leung Chin Yeung & Ors [2007] 1 HKC 164. Madam Justice Kwan held that an order of continued contribution to the estate as a condition to discharge should be made with restraint and circumspection [184C]. She also held that the trustee should not act too readily in deciding to object to automatic discharge [183H]. She ruled that the trustee has failed to discharge his quasi-judicial obligation properly and he was not entitled to recover his costs of and occasioned by the hearing out the bankrupt’s estate[191E].

5. In another case of Fred Lee v Tong Yuk Kin unreported HCB22870 of 2002, Deputy Judge To agreed with Kwan J.’s ruling that the application for suspension should not be used as a means of extracting more contribution from the bankrupt for distribution to his creditors. [para.22 of the judgment].

6. In another case of Fred Lee v Liu Man Hoo unreported HCB11719 of 2002, Lam J. held that the trustee should make necessary investigation before making decision whether it is appropriate to object discharge of bankruptcy. [para.13 &16]. Lam J. also held that the trustee had to give the court the relevant information the circumstances under which the debts were incurred for the court to form a balanced view. [para.51] The Judge finally held that the trust had failed to make the necessary investigation in that the trustee had failed to interview the bankrupt regarding his pre-bankruptcy conducts before he decided to raise an objection based on section 30A(4)(d). [para.52] In the end he dismissed the trustee’s application. Parties had reserved the argument on the issue of costs. Lam J. had made an order nisi that the bankrupt’s costs be paid out of the estate.

7. In a case of Fred Lee and Chow Wai Lan v Lai Wai Hung unreported HCB14977 of 2002, having heard the evidence, I ruled that the trustees had failed to make reasonable investigation before taking out the application to object discharge of bankruptcy. Following the decision of Madam Justice Kwan in the above case, I disallowed the costs of the trustees to be paid out of the estate. Having heard the argument of counsel for the bankrupt, who asked for costs of the proceedings, I also held that since the creditors did not give instructions to the trustees to take out the application and the trustees took it out on their own initiative, I ordered that the trustees had to pay the bankrupt’s costs personally.

8. It is against the above background that I consider the trustee’s costs on my own motion. Now I shall consider the facts of this case.

Merits of this case

9. The court made a bankruptcy order on 12 September 2002 on the bankrupt’s petition. The bankrupt should be discharged of bankruptcy under section 30A of the Bankruptcy Ordinance on 12 September 2006 were it not for this application of the trustee.

10. The trustee took out this application on his own initiative. None of the creditors of the bankrupt had informed him that they intended to object to the bankrupt’s discharge. [Trustee’s 1^st affirmation para 6]

11. Upon the trustee’s application, on 8 September 2006 the court made an interim order suspending the running of the relevant period under section 30A(2)(a) of the Bankruptcy Ordinance pending the determination of the trustee’s application. In effect, the bankruptcy period has been prolonged for more than one year.

12. The trustee relied on 2 grounds to support his application: (a) that the bankrupt should not have obtained the loans from UA in April 2002 as he was aware that he was unable to repay the loan; and (b) the bankrupt misrepresented his financial positions to the Official Receiver and two banks because he had failed to disclose all his loans to the Official Receiver in a questionnaire and to JCG and Asia Commercial Bank for his applications for the bank loans from these 2 banks. [Trustee’s 1^st affirmation para 27-35]

13. In the questionnaire to the OR, the trustee complained that the bankrupt had omitted one loan of HSBC. In his application for loan of $300,000 from JCG, the bankrupt had failed to disclose all other loans and credit facilities at that time and the 1^st mortgage of his property. For the application to Asia Commercial Bank for loan, not only did the bankrupt fail to disclose all his credit cards and loans, he had also misrepresented to the bank that he had no instalment loan and no overdraft.

14. I ask Miss Ng, who acts for the trustee, that when the trustee had the information about the bankrupt, did the trustee make any investigation with the bankrupt so that the trustee might consider the explanations that the bankrupt might have before deciding to take out the present application. She tells me that the trustee did not do so. The trustee kept the information on papers and waited near the end of the bankruptcy period and took out the application to object the discharge of bankruptcy. Nor did the trustee make any enquiry with the financial institutions involved throughout. This is similar to the case of Lai Wai Hung.

Bankrupt’s evidence

15. The bankrupt has filed his affirmation on 30 April 2007 in opposition to the trustee’s application objecting to his discharge of bankruptcy. The bankrupt explained that the UA loan was pre-approved by the bank and he was badly in need of money to repay his debts and he had not thought of bankruptcy at the time of the application. [Affirmation para.6]

16. In his affirmation, the bankrupt denied having the intention of making misrepresentation to the OR and the banks. He did not bring all his documents to the OR when he filled in the questionnaire. He could not remember the HSBC loan made in March 2002. He had no intention of hiding as he had disclosed all his information, including the HSBC loan in the statement of affairs. This the trustee does not dispute. [Affirmation para.7]

17. The JCG loan was made as a renewal of the previous loan, which was made since 1996. The bankrupt took the tax assessment statements, monthly salary statements and bankbook to the staff of JCG, who filled in the application form for him. He had no intention of hiding other loans from JCG. In his monthly salary statements, it showed the Home Finance Allowance (Mortgage) with monthly payment to the Bank of America. He admitted that he signed the application form filled out by the staff of JCG without confirming all the details. But he had no intention of hiding the information from JCG. [Affirmation para.8]

18. The Asia Commercial Bank (Asia) credit card application was made in one of the promotional booths in Tsim Sha Tsui Branch. The bank representatives filled out the form for him. Knowing that he was a civil servant, the bank representative told him that he did not require detailed financial information and the bankrupt should give the information of the credit cards he was carrying at that time. The number “3” for the credit cards was filled in by the bank representative, who also told him that the bank would request for further information if required later on. [Affirmation para.9]

19. The trustee has given no evidence to rebut the bankrupt’s evidence above.

Trustee’s arguments

20. Miss Ng submits that the trustee was correct to take out the present application because of the following reasons: (1) he had considered the information before he took out the present application and the bankrupt was heavily in debt when he applied for the UA loan; (2) also, from the application forms for the loan and the credit card, it was clear that the bankrupt had not fully disclosed all the debts and credit facilities to the banks and (3) there were no decided cases such as those decided by Kwan J. and Lam J to guide the trustee’s conduct.

21. As to the reasons (1) and (2), now the trustee has withdrawn his application. The bankrupt has given evidence in affirmation, in which the bankrupt argued that he did not have the intention of over-borrowing immediately prior to his petition for bankruptcy and that he did not have the intention of making misrepresentation to the Official Receiver or to the banks. The trustee has not filed any evidence to refute the bankrupt’s evidence. This is simply because the trustee has not done any investigation with the bankrupt, the Official Receiver or the banks involved.

22. As to reason (3) that there was no case to guide the trustee in his exercise of his discretion to object the bankruptcy, I do not accept this argument because the proper approach in respect of exercise of discretion to suspend discharge has been clearly set out by Madam Justice Le Pichon in the case of Re: Hui Hing Kwok v The Official Receiver [1999] 3 HKC 683. In this case, the learned Judge decided that the burden was on the Official Receiver to show that the bankrupt was intending to cheat the bank and the Official Receiver had failed to discharge this burden. Even for the offence that the bankrupt had committed, namely obtaining of credit in excess of $100 without first informing that person that he was an undischarged bankrupt, for which the bankrupt was sentenced 6 months’ suspended sentence, the learned Judge took the view that since the intention of the legislation was to rehabilitate the bankrupt and that the bankrupt had been adequate punished for his failing, she declined to exercise the discretion to suspend the discharge. I take the view that Kwan J.’s and Lam J.’s decisions are not setting out the guidelines for the trustee’s conduct. It is fundamental for the trustee to act reasonably and with common sense. It does not require any decided case to tell the trustee that he should not take out application to object discharge bankrupt lightly, particularly in light of Le Pichon J’s decision mentioned above. Nor does it require any decided case to tell the trustee that he should make further investigation as soon as he has identified defaults committed by the bankrupt, giving the bankrupt the chance to explain his conducts and to make enquiry with the bank staff involved in order to verify the explanations given by the bankrupt. Kwan J’s and Lam J’s judgments only pointed out the mistakes and shortcomings of the trustee.

Conclusions

23. I take the view that had the trustee made the proper investigations into the matter as soon as he had discovered the information on which he suspected that the bankrupt had made misrepresentations to the OR and the banks, he would be able to obtain the explanation from the bank. He could then verify the bankrupt’s explanation with the OR and the bank staff concerned. He would be in a better to assess whether he should take out an application against the bankrupt objecting to his discharge of bankruptcy.

24. In the recent Decision of Lam J. in Fred Lee, trustee of the property of Liu Man Hoo, a bankrupt v Liu Man Hoo unreported HCB 11719/2002, Lam J. agreed with the decision of Kwan J. in Lee Fred v Leung Chin Yeung [2007] 1 HKC 164 that an application to object to discharge is a serious matter and it should not be embarked upon lightly. [para.10] The trustee should consider all relevant circumstances to see whether there is at least an arguable case that the court will order suspension of the discharge against the bankrupt. [para.12] The trustee should make necessary investigation before making decision whether it is appropriate to object discharge of bankruptcy. [para.13 & para.16]

25. It can be seen quite obviously that the trustee in this application has failed to discharged his duties of making proper or reasonable investigations before he took out his application to object the bankrupt’s discharge of bankruptcy. In the circumstances, I followed the decisions of Kwan J. in Leung Chin Yeung’s case mentioned above as I did in Lai Wai Hung’s case and I disallow the trustee’s costs, including the costs for today’s hearing, from the estate.

(K.W. Lung)
Master of the High Court

Miss M. Ng of Messrs Lee & Chow for Applicant

Respondent appear in person

FRED LEE, TRUSTEE OF THE PROPERTY OF PANG LAI FAI WILLY, A BANKRUPT v. PANG LAI FAI WILLY

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