Discharge From Bankruptcy or Trustee Forever!!

By Rosenna Mak

Following the Bankruptcy (Amendment) Ordinance 1996, which came into effect on 1 April 1998, the concept of a bankrupt being entitled to an automatic discharge was introduced to allow a bankrupt to become financially rehabilitated.  Under the new provisions, a bankrupt is automatically discharged unless the trustee or a creditor objects.  A first-time bankrupt will be discharged four years from the date of the bankruptcy order, while someone who has previously been bankrupt will be discharged after five years.

Upon the making of the bankruptcy order, the property of a bankrupt vests in the trustee.  During the bankruptcy period, the bankrupt has certain duties and is required to assist the trustee to recover and realise any of their assets.  However, what is the position if a bankrupt leaves Hong Kong prior to the making of the bankruptcy order? In other words, when does the 4-year period (assuming a first-time bankruptcy) start to run? Does it run from the date of the bankruptcy order, even though the bankrupt is not in Hong Kong; or does it run from the date on which the bankrupt returns to Hong Kong?

Pursuant to s.30A(10)(a) of the Bankruptcy Order (“BO”), 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. The period only starts to run when the bankrupt returns to Hong Kong and notifies the trustee.  In an extreme situation, the discharge may never happen if the bankrupt does not return to Hong Kong.

In Re Chang Hyun Chi [2013], the legislation on this point was challenged.  In this case, Mr Chang was in Korea when the bankruptcy order was made.  He sought an order that he was entitled to an automatic discharge four years after the date of the bankruptcy order made against him, regardless of his departure from Hong Kong prior to the making of the bankruptcy order and that s.30A(10)(a) of the BO was unconstitutional.

His application was dismissed.  The Honourable Mr Justice Chung was of the view that s.30A(10)(a) of the BO is not unconstitutional.  The presence of a bankrupt in Hong Kong is important to the administration of the bankrupt’s estate by the trustee.  The fact that a bankrupt is absent from Hong Kong at the beginning of the bankruptcy hinders the bankrupt’s cooperation with the trustee in realising the assets in the estate and potentially in the general administration of the bankruptcy.  Indeed, it would be unjust if a person could escape from their responsibilities simply by leaving Hong Kong before the order is made and returning to Hong Kong only after the expiration of the automatic discharge period.

This case is subject to an appeal, which it is understood depends on the Legal Aid Department accepting the bankrupt’s application for legal aid to facilitate the appeal.

S.30A(10)(b) of the BO differs from s.30A(10)(a) in that it deals with the situation where a bankrupt leaves Hong Kong after the commencement of bankruptcy.  The Court of Final Appeal decided in Official Receiver & Trustee in Bankruptcy of Chan Wing Hing and Anor v Chan Wing Hing and Anor & Secretary for Justice (2006) that s.30A(10)(b)(i) of the BO, which deals with a bankrupt being required to notify his trustee of any departure from Hong Kong, is unconstitutional, because the right to travel is protected and guaranteed under the Basic Law of Hong Kong.  As a consequence, s.30A(10)(b)(i) has become inoperative.

In view of the unconstitutionality of s.30A(10)(b)(i), it is understood that The Financial Services and The Treasury Bureau is reviewing what is known as the “abscondee regime” of the BO and is considering reforming it if appropriate.

What is the position of the trustee in all this? Can a trustee apply for their release if the bankrupt has not been discharged from the bankruptcy?  It has been argued that the trustee should not be released if the bankrupt has not been discharged, for the reason that the trustee has not yet completed the administration of the estate, particularly in terms of fulfilling the statutory duty to investigate the bankrupt’s conduct under s.86A of the BO.

Considering the outcome of the above cases, it becomes a practical question as to whether a trustee can ever be released if a bankrupt flees from Hong Kong before the bankruptcy order and never returns. Is there any mechanism that will allow the trustee to be released?  At the moment, it seems that the answer to this question is no.

S.94 of the BO provides for the circumstances where the Court may make an order for the release of the trustee.  It ties the release to, amongst other things, asset realisations, the distribution of a dividend (if any), a voluntary arrangement, the trustee’s resignation or removal, but not directly to the discharge of the bankrupt.

In a situation where a bankrupt (who is not resident in Hong Kong), leaves Hong Kong before the commencement of his bankruptcy and does not return, the trustee, even if willing to do so, is technically unable to administer the bankrupt’s estate or to investigate the bankrupt’s conduct.  In fact, the trustee has no control over the bankrupt’s return to Hong Kong, and hence the start of the bankruptcy period.

Should the trustee be “penalised” by being condemned to act as the trustee indefinitely, simply because the bankrupt falls within the provision of s.30A(10)(a) of the BO and the bankruptcy period has not started to run?

We will revisit this issue in the near future once the FSTB’s proposed approach to this problem becomes clearer.

Rosenna Mak

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