Bankruptcy – The Unconstitutionality of the Discharge Provisions

By Rosenna Mak

The Hong Kong Court of Final Appeal (“CFA”) recently upheld the decision of the Court of Appeal and ruled that s.30A(10)(a) of the Bankruptcy Ordinance (“BO”) is unconstitutional.

To recap; s.30A(10)(a) of the BO provides that the bankruptcy period does not start running if a bankrupt has left Hong Kong before the making of the bankruptcy order.  The period only starts to run when the bankrupt returns to Hong Kong and notifies the trustee.

What is the decision?

In simple terms, a bankrupt’s right to travel, as set out in the Basic Law, overrides the provisions of the BO.  The commencement date of the bankruptcy starts on the date of the bankruptcy order disregarding the presence or otherwise of the bankrupt in Hong Kong.

Background

By way of a reminder, let’s go back to 2006.  The debtor was adjudged bankrupt in Hong Kong on 20 December 2006.  However, he left Hong Kong prior to the making of the bankruptcy order.  He came back to Hong Kong on numerous occasions between 2008 and 2011, but he did not notify his trustee.  His trustee applied to the Court for him to be examined pursuant to s.29 of the BO.  Since he failed to attend the examination, a prohibition order and a warrant for his arrest were issued on 3 May 2012.  A week later on 10 May 2012, he was arrested on his arrival in Hong Kong.  He pointed out that the s.29 examination order could not be enforced because he was no longer a bankrupt, following his automatic discharge on 21 December 2010 (the expiration of the four-year period).  He sought a declaration that s.30A(10)(a) is unconstitutional as it interferes with the freedom to travel.

On 2 May 2013, the Court of First Instance confirmed that pursuant to s.30A(10)(a), the bankruptcy period does not start running if a bankrupt has left Hong Kong before the commencement of the bankruptcy and has not returned to Hong Kong.  On 11 December 2014, the Court of Appeal declared s.30A(10)(a) unconstitutional because the restriction on the bankrupt’s right to travel was considered more than was necessary.  The Official Receiver appealed to the CFA.  On 5 November 2015, the CFA upheld the decision of the Court of Appeal and confirmed that s.30A(10)(a) is unconstitutional.

What does it mean in real life?

Given the latest developments and the automatic discharge provision, a cunning bankrupt could, in theory, escape from his/her duties and liabilities by leaving Hong Kong prior to the making of a bankruptcy order and then returning to Hong Kong after four, five or even eight years (being the maximum bankruptcy period should there be any objection to the automatic discharge) from the date of the bankruptcy order.  In that case, it’s arguable that the bankrupt can “lawfully” avoid cooperating with the trustee and complying his/her statutory obligations. However, this is where the Bankruptcy (Amendment) Bill 2015 comes in.

Bankruptcy (Amendment) Bill 2015

A draft Bankruptcy (Amendment) Bill 2015 has been placed before LegCo which is aimed squarely at bankrupts who do not cooperate with their Trustee or who abscond from Hong Kong.  Go to our previous article on “Discharge From Bankruptcy – The Latest” for more details of the draft Bill.  Pursuant to the provisions of the new Bill, the trustee can apply to the Court for a non-commencement order if a bankrupt fails to attend the initial interview or to provide the trustee with the information requested.  Nevertheless, because the proposed commencement date for the new Bill is 1 November 2016, and it will not be retrospective, there is a vacuum until the law is put into effect where it’s conceivable that unscrupulous bankrupts could “game” the system.

However, in circumstances where a bankrupt leaves Hong Kong with the intention of defeating his creditors and does not cooperate with the trustee, the trustee can still apply to the Court for the period of the bankruptcy to be extended for a period of up to a further four years due to the bankrupt’s non-cooperation.

As ever, if you have any questions regarding this or any other insolvency related issue please feel free to contact us.

Briscoe Wong Advisory