Whose interests should prevail in bankruptcy: the interests of the bankrupt’s creditors or his/her innocent spouse and dependents? A recent case before the Hong Kong Court confirmed that, in the majority of cases, it is the former
When the Bankruptcy (Amendment) Ordinance (“BO”) was introduced in 1998, one of the main changes was in relation to how the bankrupt’s family home should be dealt with. The legislation followed the changes implemented in the 1986 Insolvency Act in the UK by setting out in s.43F of BO that the bankrupt can continue the occupation of family home for a period of 6 months and a further 6 months upon Court application. S.43F, however, refers to the bankrupt and does not cover the occupation rights of the non-bankrupt spouse or their children.
If the family home is jointly owned by the bankrupt and the non-bankrupt spouse or other co-owners, the trustees in bankruptcy (“Trustees”) can make an application to the Court to recover the bankrupt’s share in the family home for the benefit of the bankrupt’s creditors.
In the recent case Re Liu Yi Fang, this principle was confirmed, whilst at the same time the Court also dealt with the issue of occupation rent payable by the non-bankrupt co-owner.
The Legal Position
On the making of the bankruptcy order, two things happen to the bankrupt’s properties by operation of law. Firstly, upon the making of a bankruptcy order and the appointment of the Trustees, a bankrupt’s interest in his property is vested in the Trustees (s.58(2) of BO). Secondly, any property of the bankrupt held in a joint tenancy is severed automatically and the severance creates a tenancy in common as between the Trustees on the one hand and the non-bankrupt co-owner on the other hand.
Meanwhile, pursuant to s.6 of the Partition Ordinance (“PO”), if it appears to the Court that a partition of the property would not be beneficial to all the persons interested, the Court may make an order for the sale of the property, notwithstanding the dissent or disability of any person interested.
The Trustees sought an order from the Court for the sale of the property, relying on the Court’s decision in Re Ng Tze Ching, and for payment of occupation rent being half of market rent for the period from the date of bankruptcy order to sate of sale of the property.
The non-bankrupt co-owner (the bankrupt’s mother) opposed, relying on the decision in Re Cheung Chan Hong, the decision in which was handed down 4 days after Re Ng Tze Ching, but where there was an opposite outcome. The two key arguments put forward by the non-bankrupt co-owner were that she was the beneficial owner of the property by virtue of the circumstances in which it had been purchased and secondly that if she were required to vacate the premises she would suffer very great hardship.
As regards the first of these two arguments, the Court was unconvinced by the limited evidence put forward and rejected the argument that the entire beneficial interest in the property belonged to her alone.
On the issue of the hardship she would suffer in the event of a sale being ordered, the Court took the view that she was in a comfortable financial position and would not have any major difficulty in finding alternative accommodation if the property was sold. In other words, it did not accept that the sale of the property would entail great hardship.
The argument is that because the Trustees, and thereby the creditors, have not been able to derive any benefit whilst the non-bankrupt co-owner is in occupation, they should pay half of the market rent of the property from the start of the bankruptcy until the date of sale.
The Court took a pragmatic view and declined to make an order after taking into account, amongst others, the following factors:-
- it may not be just to ask the non-bankrupt co-owner to pay rent if the bankrupt continues to reside in the property;
- the innocent non-bankrupt co-owner does not stop the bankrupt or the Trustees from enjoying the property (assuming that to be so);
- a reasonable period of time should be given to the non-bankrupt co-owner to consider the matter, to purchase the bankrupt’s interest in the property or relocate from the property; and
- the best way to assess the occupation rent in a fair manner and the potential professional costs associated with the assessment, inquiry or investigation
The Court also considered the non-bankrupt co-owner’s personal circumstances and the attachment she had to the property as she had resided at the property for some 30 years.
Innocent co-owner’s hardship vs creditors’ interests
In Re Liu Yi Fang, the Court did not take the approach adopted in Re Cheung Chan Hong, which was relied upon by the non-bankrupt co-owner.
In Re Cheung Chan Hong, the Court was satisfied that because of the age, the health and the very limited financial resources of the non-bankrupt co-owner, she would be likely to suffer very great hardship if the property was sold and declined to make an order for sale.
In that case, the Court held that the Trustees are in no better position than the bankrupt himself prior to his bankruptcy. As a co-owner (whether he/she is the spouse or another family member of the bankrupt, e.g. mother), neither the bankrupt (prior to his bankruptcy) nor his trustee has any superior right over the other co-owner in dictating whether the property should or should not be sold.
It further held that the court should not make an order for sale if, viewed objectively, such an order will not be beneficial to all the co‑owners or that it will result in “very great hardship” to one co‑owner, but acknowledged that the matter can only be decided on the basis of all the objective facts of the case, balancing the interest of the one against the other.
However, in Re Liu Yi Fang, the Court questioned what the right a non-bankrupt co-owner has to counter-balance that of the Trustees to have the co-owned property sold. It agreed with, amongst others, Re Ng Tze Ching that if the bankrupt’s interest in the jointly owned property no longer belongs to him in the event of bankruptcy, by same token, the ‘innocent’ co-owner spouse can no longer expect to enjoy that property indefinitely and that there is a public interest in maintaining commerical disciplines
From this and other judgements, it is clear that the Court will look very carefully at the particular factual matrix of each case. This is particularly so given that an order for sale can have quite far reaching effects on ostensibly innocent third parties.