Bankruptcy Discharge – Thorny Issues

By Stephen Briscoe

Prior to 1998 it was relatively rare for a person who was made bankrupt in Hong Kong ever to get their discharge from bankruptcy. This was because they had to satisfy a number of strict criteria, which for most bankrupts were impossible to achieve.

With the introduction of the automatic discharge provision in 1998 most bankrupts became eligible to get their discharge four years after the bankruptcy order was made. However, in recent years the Court has, on a number of occasions, had to consider various issues relating to the discharge provisions.

First were the provisions relating to the travel restrictions placed on bankrupts insofar as they impacted on the timing of a bankrupt’s discharge. The Court of Final Appeal ruled these to be unconstitutional and are dealt with in more detail here.

Next came the question of the discharge of bankrupts who were out of Hong Kong at the time the bankruptcy order was made and who never returned, and those who left Hong Kong after the bankruptcy order was made. As we set out in this post, the Court of Appeal also considered these provisions to be unconstitutional, although this issue is likely to go the Court of Final Appeal for a definitive decision.

In the light of other recent decisions it is therefore worth considering another thorny issue regarding discharge – when someone, usually the trustee, objects to the automatic discharge.

Most bankrupts are discharged from their bankruptcy four years from the date on which the bankruptcy order was made. However, there are certain circumstances in which a Trustee or a creditor can object to the automatic discharge. In recent months there have been two cases decided by the Hong Kong courts which have addressed differing aspect of this particular issue. In the first case, the Trustee appealed against the period for which the Court had suspended the bankrupt’s discharge with the result that the period was extended. In the second case, the period of the bankruptcy was extended because the court took the view that the pre-bankruptcy behaviour and subsequent lack of cooperation by the bankrupts warranted an extension.

In the first case, the bankrupt’s discharge was initially granted subject to a suspension of twelve months. The trustee appealed. The grounds of the appeal were that the conduct of the bankrupt in failing to cooperate fully with the trustees had been such that the period of the discharge did not fully reflect the seriousness of his behaviour. In particular as well as failing to cooperate with his trustees, he had failed to properly utilise his earning potential during the period of his bankruptcy by working for a family company for an extremely low salary. In reviewing the decision of the Master, the Judge took the view that whilst the second of the two complaints had been taken into account, it seemed that insufficient consideration had been given by the Master to the first of the two issues – one that is arguably much more important – that is the lack of cooperation by the bankrupt. The court made it clear that a bankrupt has a positive duty to cooperate with his or her Trustee and in particular to disclose their assets and not leave it for the Trustee to discover them. As a result, the suspension of the discharge was extended for a further twelve months.

In the second of the two cases the bankrupts (this time a husband and wife) had clearly made life difficult for the Trustees in undertaking their duties. In addition, prior to the commencement of the bankruptcy, they had entered into certain agreements which the court held were designed to benefit themselves and by extension were to the detriment of their creditors. The bankrupts also controlled a number of US corporations which owned properties in the USA but did not cooperate in realising their interest in these entities. Indeed it appears that the bankrupts caused the Trustees to incur significant costs in the US courts in efforts to try to prevent the realisation of their interest. In this case the bankrupts were seen as having not cooperated by, among other things, pursuing multiple legal actions designed to frustrate the Trustees in the execution of their duties. For a more comprehensive explanation of the case read this article.

These issues were raised by the trustees in their objection to the bankrupts being given an automatic discharge. As a result their respective discharges were suspended for 18 and 15 months respectively.

The take-away from these two cases is that bankrupts who do not cooperate with their trustees, regardless of the form that lack of cooperation takes, can have every expectation that their discharge will be suspended. The court will also take into account the pre-bankruptcy behaviour when considering a suspension of the discharge.