CHINA MERCHANTS BANK CO LTD AND ANOTHER v. CHENG CHAO MING

CACV 136/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 136 OF 2009

(ON APPEAL FROM HCB 18932 OF 2002)

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J U D G M E N T

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Hon Cheung JA :

The issue

1. The issue in this appeal is whether a bankrupt is liable to have his period of bankruptcy being extended more than once on the application of the trustee in bankruptcy or his creditors under section 30A(3) of the Bankruptcy Ordinance (Cap. 6) (‘the ‘Ordinance’).

The statutory scheme

2. To understand this issue, it is necessary to refer to the operation of the current scheme of bankruptcy under the Ordinance.  This has been reviewed by the Court of Final Appeal in Official Receiver & Trustee in Bankruptcy of Chan Wing Hing & Another and Chan Wing Hing & Another and Secretary for Justice (2006) 9 HKCFAR 545 at 551 and 553.  I will set out what Li CJ said on this topic :

‘ 1. In 1996, the bankruptcy legislation was amended to introduce a new scheme regulating discharge from bankruptcy.  Under the previous scheme, a court order for discharge was necessary and it was extremely difficult for a bankrupt to obtain one.  The aim of the new scheme is to facilitate discharge of the bankrupt.  Its central feature is the concept of automatic discharge.  The bankrupt is to be discharged after the expiration of a prescribed period subject to the court ordering extension on specified grounds subject to a statutory maximum………

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A.  The Scheme

10.   The scheme regulating discharge is contained in s.30, 30A and 30B of the Ordinance.  Section 30 provides that the bankruptcy of a person against whom a bankruptcy order has been made (a) commences with the day on which the order is made and (b) continues until he is discharged under s.30A or 30B.

11.   The concept of automatic discharge is implemented in ss.30A(1) and (2).  Section 30A(1) provides that:

Subject to this section, a bankrupt is discharged from bankruptcy by the expiration of the relevant period under this section.

The relevant period is set out in s.30A(2) (the relevant period).  For a person adjudged bankrupt for the first time (a first-time bankrupt), the relevant period is four years beginning with the commencement of the bankruptcy, that is, the day of the bankruptcy order.  For a person who has been previously adjudged bankrupt (a previous bankrupt), the relevant period is five years.

12.   But on the application of the trustee or a creditor, the court may order that the relevant period shall cease to run for such period as may be specified in the order (the further period) up to a maximum period of four years in the case of a first-time bankrupt and of three years in the case of a previous bankrupt.  This is provided for in s.30A(3) which reads:

“(3)    Where the court is satisfied on the application of the trustee or one of the bankrupt’s creditors that a valid objection based on one or more of the grounds set out in sub-s.(4) has been made, the court may order that the relevant period under this section shall cease to run for such period, not exceeding, in the case of a person who:

(a) has not previously been adjudged bankrupt, four years; or

(b) has previously been adjudged bankrupt, three years,

as may be specified in the order.

The effect of an order under this provision is to postpone the time of discharge beyond the relevant period by the further period specified in the order.  Thus, where the court makes an order specifying the maximum further period of four years for a first-time bankrupt and of three years for a previous bankrupt, the bankrupt would only be discharged after a total of eight years.  Where such an order has been made, the court may, on the bankrupt’s application at any time, having regard to the interests of all the parties, lift the suspension or shorten the period of suspension.  Section 30A(7).’  (emphasis added)

(See also Official Receiver v. Chan Kwok Keung [2008] 5 HKLRD 752 per Le Pichon JA at paragraphs 9-10 where the Court was also of the view that the maximum period was eight years.)

Facts of the present case

3. In this case, China Merchants Bank (‘the Bank’) a creditor of Cheng Chao Ming (‘the Bankrupt’) petitioned for his bankruptcy.  A bankruptcy order dated 4 December 2002 was made against the Bankrupt.

4. Under the scheme, the Bankrupt’s bankruptcy period of four years would have automatically expired on 4 December 2006.  On 11 November 2006 the Trustees in bankruptcy applied under section 30A to postpone the automatic discharge that was due on 4 December 2006.  Master Yu granted the application on 25 July 2007 and ordered that the relevant period would cease to run for a period of two years commencing on 3 December 2006, meaning in effect that the bankruptcy period was extended by another two years up to 4 December 2008.

5. Before the expiration of the extended bankruptcy period, the Bank on 11 November 2008 applied for a further postponement of the Bankrupt’s discharge.  Master Hui granted the application and ordered that the discharge be postponed for another period of 18 months from 3 December 2008, meaning that the Bankrupt would now only be discharged on 6 June 2010.  The Bankrupt now appeals against Master Hui’s order.

The parties’ position

6. We were informed by counsel for the Bank that it had invited the Trustees to apply for the further postponement but they had declined to do so, hence the Bank made the application itself.  The Trustees took a neutral stand before the Master and this Court.  They were not present in this appeal. 

7. At the invitation of this Court, the Official Receiver represented by Mr. Jeremy Glen, attended the appeal.  He took the view that the period of bankruptcy can only be postponed once.  He informed the Court that the first applications for suspension of automatic discharge of bankrupts were made in 2002, four years after the introduction of section 30A into legislation.  From 2002 to April 2010 there have been 1,065 orders of suspension of discharge made.  Of these, 389 orders suspended the period of bankruptcy for periods of less than four years.  The Official Receiver has never applied for a further extension of the period of bankruptcy in any of the 389 cases where the order of suspension was less than four years.  Apart from this case, Mr. Glen was not personally aware of any other cases where a further extension has been granted.  In practice an objection to discharge is heard by the Court very shortly before the expiration of the relevant period.

8. The Bankrupt and the Bank, of course, took opposite views.  The Bankrupt saying that there can only be one order for postponement while the Bank said that there can be multiple orders.

TheBankrupt’s grounds

9. The Bankrupt in opposing the multiple postponement approach relied on a number of grounds including that the intent of new scheme is for the rehabilitation of the Bankrupt which will be defeated by multiple postponement of the bankruptcy period.  Further a multiple postponement is contrary to the provision of the Basic Law on the protection of property. 

Construction of the Ordinance

10. The new scheme was first introduced by the Law Reform Commission (the ‘Commission’) of Hong Kong in the Report on Bankruptcy (May 1995) (‘the Report’).  The purpose of the Commission’s recommendation for the automatic discharge with the objection system can be gathered from paragraph 17.16 of the Report :

‘ the rehabilitation of a bankrupt from bankruptcy would be assured, subject to rehabilitation being delayed as a consequence of a bankrupt’s own failings.’

11. In my view ultimatelythe issue raised in this appeal falls on a narrow compass, namely, whether as matter of construction of the relevant parts of the Ordinance, multiple postponement can be made.  This is a narrow point but as often said, a case is usually decided on a narrow point.

The maximum bankruptcy period

12. In my view the key to resolve the issue lies in the provisions relating to the maximum period of bankruptcy. 

13. Mr. Liu Man Kin who appeared together with Ms Eleanor Yeung for the Bank informed this Court that at the hearing below, he had accepted that eight years was the maximum period, however he now regarded this to be an open question.  He argued that the views of the Courts in the two cases I have referred to were merely made by way of comments since the issues that they have to decide were not about the maximum period.  In Chan Wing Hing, the issue is whether one of the grounds for postponement, namely, the Bankrupt leaving Hong Kong without notifying the trustee is in breach of the ‘freedom of movement’ provision guaranteed under the Basic Law.  In Chan Kwok Keung the issue is on the power of the Court to grant interim orders postponing the bankruptcy period before the hearing of the substantial application.

14. While the issues before the Courts in these two cases were on a different topic, my view is that the construction they placed on the maximum period of bankruptcy is correct. 

15. The starting point is that under section 30A(1) the bankrupt is ‘discharged from bankruptcy by the expiration of the relevant period’ unless there are objections from the trustee or creditor.  The ‘relevant period’ for the automatic discharged is provided by section 30A(2), namely four years (for a first time bankrupt) or five years (for a previous bankrupt). 

16. However, on a successful objection by the trustee or a creditor, the Court may under section 30A(3) extend the period to a further four years (for a first time bankrupt) or three years (for a previous bankrupt).  The extension is the result of implementing the words ‘the court may order that the relevant period….. shall cease to run for such periods not exceeding’ four years (for a first time bankrupt) and three years (for a previous bankrupt) under section 30A(3).  The end result is a maximum bankruptcy period of eight years.  This is the only proper construction of section 30A which applies with equal force to both a first time bankrupt and a previous bankrupt.

Legislative intent

17. Further the construction is also in accordance with the legislative intent.  The recommendation at paragraph 17.48 of the Report was for a maximum period of eight years :

‘We recommend that it would be appropriate, with one exception, for the period of objection to extend bankruptcy to eight years after the date of the making of the bankruptcy order.’ 

18. The exception referred to was for an absconding debtor.  The subsequently enacted legislative provision on a bankrupt leaving Hong Kong without notifying the trustee (section 30A(10)(b)(i)) which would also trigger the suspension of the bankruptcy period was held in Chan Wing Hing to be unconstitutional. 

19. The Commission made the recommendation of a maximum eight year period notwithstanding its knowledge that in England, for example, the suspension of discharge can run for an indefinite period.

20. Further at the second reading of the bill which introduced the new scheme, the Secretary for Financial Services clearly stated that the total maximum period of a bankruptcy should be eight years.

21. These materials overwhelmingly support a maximum bankruptcy period of eight years and not an indefinite period.

Multiple applications

22. The provision for the postponement of the bankruptcy period is found in section 30A(3) which has been already set out earlier.  It did not refer to multiple applications.  The wording chosen was ‘the application’ instead of ‘an application’ or ‘the applications’.  Further it provided that the Court may order the relevant period shall cease to run for ‘such period’ instead of ‘such periods’.  Even if, for the purpose of argument, applying section 7 of Interpretation and General Clauses Ordinance (Cap. 1) that words in singular include the plural, a more fundamental problem with a pluralistic construction is that words restricting the total period to a maximum of eight years despite multiple applications and orders are missing from section 30A(3).  Such words must be ‘imported’ into section 30A(3) if multiple postponements are allowed.  Otherwise the Court cannot have regard to the eight year maximum period each time it is being asked to exercise its powers under section 30A(3).  This may result in the overall maximum bankruptcy period being extended beyond eight years which is not permissible.  These are important words and are too material to be supplanted by the Court.  In my view the omission of these words and the structure of section 30A(3) clearly indicate that section 30A(3) does not envisage multiple postponements.

23. The Commission referred to the bankruptcy practice of other jurisdictions including that of Scotland.  It should have been aware that under the Scottish modern bankruptcy system there may be two or more periods of cessation under section 54(9) of the Bankruptcy (Scotland) Act 1985 (See Butterworths Insolvency Law Handbook 5^th Ed at page 398).  Yet the Commission did not make any recommendation for multiple postponement of the bankruptcy period.

24. The power of the Court to make interim orders before a substantial hearing for postponement which may take place only after the initial bankruptcy period has expired will not assist the Bank’s argument for multiple postponement because the jurisdiction to make such an interim order is to prevent the legislature’s intention being rendered futile ‘if the bankrupt concealed his activities until the last moment or managed to gain an adjournment’ : see Bagnall v. Official Receiver [2004] 1 WLR 2832 which was adopted in Chan Kwok Keung.  The power to make interim order does not mean that there is power to grant multiple postponements.

Other sanctions

25. I further agree with Mr. K M Chong (who appeared with Mr. Aidan Tam and Mr. Lester Lee as counsel for the Bankrupt) that there are other remedies and sanctions available to the trustees after the discharge or where a bankrupt becomes unco-operative or new evidence comes into light on the bankrupt’s hidden assets after the first postponement.  Hence, a further postponement is not the only remedy available against a recalcitrant bankrupt.  For example,

1)   under section 30A(a), when the Court grants a discharge, it may impose conditions requiring the bankrupt to continue to make contribution for a period not exceeding eight years from the date of the bankruptcy order.

2)   under section 30A(8), the discharged bankrupt is required to continue his co-operation with the trustee at the risk of being punished for contempt of court.

3)   under section 43A, the trustee may claim for property which the bankrupt may acquire after bankruptcy.

4)   criminal penalty is imposed on a bankrupt who, among other things, had failed to disclose his assets to the trustee (section 129); obtained credit (section 131); transferred assets (section 132); gambled or engaged in speculation (section 133); failed to keep proper accounts (section 134); absconded with property (section 135) or concealed himself to avoid service of any process in bankruptcy (section 136).

Basic Law

26. In the light of my conclusion it is not necessary for me to express any views on whether the Basic Law is engaged.

Conclusion

27. In my view there is no jurisdiction to make a further postponement of the bankruptcy order after the first postponement order.  Accordingly the appeal is allowed and the Master’s order is set aside.

Costs

28. There will be a provisional order that the Bank is to pay the Bankrupt costs of the appeal (with certificate for two counsel) and below, the trustees of their costs below and also the Official Receiver of the costs of appeal.

Hon Yeung JA :

29. I agree with the judgment of Cheung JA.

Hon Chung J :

30. I agree.

CACV 136/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 136 OF 2009

(ON APPEAL FROM HCB NO. 18932 OF 2002)

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BETWEEN

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J U D G M E N T

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Hon Cheung JA :

1.  A bankruptcy order was made against the Bankrupt on 4 December 2002. On the application by the Trustees in Bankruptcy, the bankruptcy period which was then due to expire on 3 December 2006, was extended by Master Yu to 3 December 2008. On an application by the Applicant, Master Hui further extended the bankruptcy period by another 18 months from 3 December 2008.

2.  The Bankrupt appeals against Master Hui’s order. The Applicant now applies for security for costs of the appeal against the Bankrupt in the sum of $298,500.

3.  The Court of Appeal may in special circumstances impose security against an appellant. Impecuniosity of the appellant is an example of special circumstances. The basis of the present application is that the Bankrupt is an undischarged bankrupt and therefore fulfils the impecuniosity requirement. I agree.

4.  This does not, however, mean that a bankrupt would invariably be deprived of a substantive chance of appeal. The Court still retains the discretion not to impose security where the bankrupt has raised a meritorious appeal.

5.  The substantive ground of appeal is that under section 30A of the Bankruptcy Ordinance (Cap. 6), Master Hui had no jurisdiction to further extend the bankruptcy period and that he was wrong to extend it. Whether the Master has jurisdiction to entertain multiple suspensions is, in my view, an arguable point only . Without expressing a final view of the matter, I do not consider that the relevant section of the Bankruptcy Ordinance is not capable of allowing multiple applications. The fact that this issue raises a matter of public importance does not mean that security should not be imposed. Given the Master’s view that the Bankrupt had not fully responded to the allegation made against him in respect of the interests and benefits that he had received, I am not convinced with his explanation that he would not be able to furnish the security by other means.

6.  In the circumstances, the Court should exercise the discretion in favour of granting security. The appeal will not be overly complicated. In my view the appropriate amount to be imposed is $150,000.

7.  The amount is to be paid into court within 42 days. Pending payment in, the appeal is stayed. In default of payment in, the appeal is dismissed with costs to be Applicant.

8.  Costs of this application be in the cause of the appeal.