Bankruptcy Discharge in Hong Kong – Update

HK Bankruptcy Discharge Objections: A Word to the Wise

by Wong Teck Meng

Prior to 1998 it was relatively rare for a person in Hong Kong  who was made bankrupt 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 Hong Kong bankrupts became eligible to get their discharge four years after the bankruptcy order was made. In recent years however 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. This would link to the article posted on our site on 21 May 2014.

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. This would link to the article posted on our site on 6 January 2015.

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 aspects 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 here. 

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.

 

Bankruptcy (Amendment) Bill 2015

By Rosenna Mak

In a previous post in November 2015 entitled “Bankruptcy – The Unconstitutionality of the Discharge Provisions”, we referred to a draft Bankruptcy (Amendment) Bill 2015 being put before LegCo for the purpose of addressing the CFA’s ruling on the unconstitutionality of certain of the existing discharge provisions.  On 17 March 2016, LegCo passed the Bankruptcy (Amendment) Bill 2015 (“Bill”).  The Bill targets those bankrupts who do not cooperate with their trustee or who abscond from Hong Kong.  However, it is not retrospective and will only be applicable to those against whom a bankruptcy order is made on or after 1 November 2016.

Under the new Bill, a bankrupt is required to attend an initial interview with the trustee and provide the trustee with sufficient information regarding his/her property and affairs to enable the trustee to properly investigate his/her affairs.  The Bill provides for the trustee to apply to the Court for a non-commencement order if a bankrupt fails to comply with these obligations.  If a non-commencement order is made, the bankruptcy period will not start to run until the bankrupt has cooperated with his trustee, who can then report to the Court accordingly.

 

Briscoe Wong Advisory

Cleaning Up Corporate Structures

As a business grows, there is a tendency for its corporate structure to grow with it. Over time, as the business matures, that structure may need to change to be more responsive to the ongoing needs of the business.

Every so often it is useful to stand back and review the corporate structure, to rationalise it and to remove unnecessary, and sometimes redundant, entities within the group. These may be in Hong Kong or in offshore jurisdictions such as the BVI or Cayman Islands.

As well as simplifying the group structure this process has the benefit of reducing unnecessary costs, particularly those that may be associated with increasingly burdensome compliance obligations.

This is most often achieved through the use of the members’ voluntary liquidation (MVL) procedure.

To assist you and your clients, we have prepared a guide which walks through the Hong Kong process from beginning to end – the procedures in the BVI and Cayman Islands are not that much different. We hope that you will find the guide helpful, but if you have any questions please do not hesitate to contact us and we will be happy to answer them.

A Procedural Guide to Members’ Voluntary Liquidation in Hong Kong

Briscoe Wong Advisory

Updates to the Winding-up Provisions of C(WUMP)O – An Opportunity Lost?

By Stephen Briscoe

The Administration has now posted its first substantive response to issues raised in front of the LegCo Bills Committee back in November 2015. Here is a link to the response, but in truth it paints quite a dismal picture.

First Meeting of Creditors in a Creditors’ Voluntary Liquidation (CVL)

Concerns have been expressed regarding the changes to the rules relating to the commencement of a CVL. The Administration’s response fails to address those concerns, instead simply referring to there being “… similar requirements in the UK and Australia…”.

However, there are significant differences. Both those jurisdictions have a comprehensive system of licensing of Insolvency Practitioners thus ensuring that all liquidations are properly investigated, failing which a liquidator could lose his/her licence and thus their livelihood. Second, both jurisdictions have, particularly in recent years, made sure that their regulators are properly resourced to prosecute and/or disqualify directors who break the rules. Contrast this with Hong Kong where it seems that the Official Receiver’s Office resources to pursue delinquent directors are under constant pressure from the Administration. As a result, the numbers of disqualification orders in Hong Kong is relatively low and the fines levied for liquidation offences are little more than a slap on the wrist.

Regardless, if the changes go through as proposed, it will create an opportunity for unscrupulous directors to act in a manner that could disavantage stakeholders, particularly creditors and employees. Arguments that other provisions will prevent abuse miss the point. Once the abuse has been perpetrated, liquidators are likely to be left with an uphill task trying to undo its effects, but in all probability having no funds, because they have been spirited away from the control of the liquidator. A classic case of “locking the stable door….”.

Removal of Liquidators

In justifying Clause 76, which allows a creditor or contributory to apply for the removal of a CVL liquidator, the Administration’s response is unfortunately wide of the mark. It points to the fact that similar provisions exist in respect of solvent windings up – a fact which no one disputes – but which is like comparing apples with oranges. In a solvent winding up there is rarely, if ever, the necessity for an agrieved person to want to remove a liquidator.

However, in an insolvent liquidation there are almost always aggrieved parties. If this change is implemented as proposed it will open up the possibility, the strong possibility, that someone who is a creditor, but against whom a liquidator is taking action for the purpose of benefiting the general body of creditors, can try to remove that liquidator without the liquidator having any right of recourse. Accepted, this removal has to be done at a meeting of creditors and a majority in number and three quarters in value of those creditors who attend must vote in favour of the removal. However, almost every liquidator in Hong Kong has come across situations where they have a right of action which if pursued could swell the assets of the company for the benefit of creditors. Those claims are often against people who are also creditors! What better way to defend or stifle such an action by a liquidator than by trying to remove him and replace him with someone more compliant.

Liquidators are not asking for a right of veto; all they are seeking is the right to be heard by the court in order to prevent the abuse which will almost certainly occur if the new clause is implemented as proposed.

Disclosure Requirements for Liquidators

Implementation of this clause is likely to be extremely onerous particularly for large firms. New systems will have to be introduced so that they can comply not only with the initial requirements but with the ongoing requirements of the new section.

Again, the Administration seems to have turned a deaf ear to the practical problems which have been pointed out by the profession and appears reluctant to engage with stakeholders to produce a practical and workable solution.

Other Issues

The Administration dismisses the issues of licensing for insolvency practitioners, implementation of the UNCITRAL Model Law or provisions similar to s.426 of the UK Insolvency Act. (This latter suggestion would be likely to assist in the facilitation of cross-border insolvency).

It seems quite clear, despite the form of words put forward by the Administration, that these issues have not been seriously considered. Suggestions that they “must be reviewed”, should be treated with caution given the speed with which updates to Hong Kong legislation are brought forward. In reality, the chances of any of these issues being considered by LegCo at any time in the foreseeable future are about as likely as turkeys voting for Christmas!

Conclusion

In light of the Administration’s responses to the issues raised both at the Bills Committee hearing and previously, it seems clear that, absent any surprise last minute developments, the Bill will go through substantially unchanged. Does this mean that Hong Kong’s insolvency legislation is better prepared to meet the challenges of the 21st century? Unfortunately, I believe the answer to that question is probably not – at least not materially. The changes are mainly band-aids rather than major surgery and taken as a whole it is difficult to see them, (with the obvious exceptions of the changes to the Unfair Preference provisions and the introduction of Transactions At An Undervalue), significanlty improving the corporate recovery and liquidation regimes by delivering improved recoveries for creditors.

A lost opportunity indeed!!

Briscoe Wong Advisory

Costs Orders Against Liquidators – Or Not!

By Stephen Briscoe

The application in this case was to join a funder as a party to an action commenced by the liquidators, the purpose being to make the funder and the liquidators jointly and severally liable for the costs of the unsuccessful action.

The action had been commenced by the liquidators to challenge certain transactions which they considered were void pursuant to the provisions of s.182 of C(WUMP)O – i.e. they had been made after the date of the presentation of the winding-up petition. In order to pursue the action, the liquidators had, with the sanction of the Court, entered into a funding agreement with the petitioning creditor. The agreement, contained among other things, the following clauses:

(a) Under Recital (G), GT was desirous of entering into the Funding Agreement to facilitate JSL to make an application under ss 182 and 184 of Cap 32 for an order against the Bank that certain post-petition transactions were void and JSL agreed to do so upon GT entering into the Funding Agreement.

(b) Clause 1 provided that whatever the outcome of the legal proceedings against the Bank, GT agreed to be (i) responsible for and pay all legal costs charges and expenses (including counsel’s fees) incurred or to be incurred by JSL and the Companies or any of them and (ii) responsible for paying any adverse costs order including any costs ordered in favour of the Bank and should indemnify JSL in respect of any such costs orders and the assets of the Companies depleted as a result of any such costs orders together with the legal costs charges and expenses.

(c) Clause 3 provided that while JSL should have the sole and exclusive control and conduct of the legal proceedings against the Bank, GT was entitled to be kept informed of the progress unless it had breached the terms of the Funding Agreement.

(d) Clause 4 provided that if there was an order for security for costs against the Companies, GT should upon demand put up additional funds to comply with that order.

(e) Clause 5 provided that GT expressly reserved its right to make any application to court pursuant to s 265(5B) of Cap 32.

(f) Clause 6 provided that if any order or judgment should be made or entered against the Companies or if JSL should be held personally liable for any costs damages or other liability arising out of the legal proceedings against the Bank, GT should upon demand fully pay and discharge such orders, judgments damages or other liabilities for the Companies and JSL.

(g) Clause 7 provided that without prejudice to GT’s other obligations under the Funding Agreement, it should always maintain an operation fund for the Companies of not less than HK$100,000 and should replenish the fund from time to time upon JSL’ demand save that the total funding of the operation fund should not exceed HK$300,000.

In the Court of First Instance the liquidators’ action was dismissed as was the subsequent appeal. The defendants then sought to make the liquidators personally liable for the costs and  that the funder also be liable.

The defendant, in this case a bank, sought to argue that the liquidators had acted unreasonably in running a hopeless case and for that reason they should be made personally liable for the costs – it appears that there were few or no assets in the estate. In coming to its decision that the liquidators should not be made personally liable, the Court pointed to the decisions in both the Court of First Instance and the Court of Appeal, neither of which suggested that the liquidators had been unreasonable in pursuing the action, nor that their case was hopeless. Indeed, the Court pointed out that much of what the liquidators did was based on the legal advice they had received.

However, the Court did make an order that the funder be liable for the costs. In doing so it pointed to the terms of the funding agreement and to the relevant case law which held that “where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails.”.

This is an interesting decision from the perspective of liquidators in that it reinforces the principle, that in the absence of bad faith or unreasonable behaviour, liquidators are unlikely to be made personally liable for costs that are incurred in trying to realise assets for the benefit of creditors.

However, it should also be a reminder to liquidators, that the prudent approach in such circumstances is to have the funder deposit funds with the liquidators to cover the possiblitiy of any adverse costs order.

Briscoe Wong Advisory

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

 

 

 

 

C(WUMP)O: The Dark Side

By Stephen Briscoe

Our previous posts have focused on the proposed changes to Hong Kong’s insolvency regime which are scheduled to come before LegCo in the next few months. This post is going to look at the “darker side”, (no, not Kowloon) to use the Star Wars metaphor; i.e. what is missing from the proposals; what could have been done better; and what is likely to happen in the event that there are problems with the updates to the legislation.

The two most glaring omissions from the proposals are the lack of any suggestion of implementation of the UNCITRAL Model Law for insolvency, even in the future, and the failure to introduce licensing for insolvency practitioners. There is also the “elephant in the room” that is provisional supervision and insolvent trading. This post looks at each of these in turn.

The UNCITRAL Model Law

The UNCITRAL Model Law for insolvency was first adopted in 1997 and has since been implemented by 20 jurisdictions, a number that is increasing as time goes on. In basic terms, The Model Law is a protocol designed to facilitate cooperation between insolvency courts in different jurisdictions. It arose out of the increasing number of cross-border insolvencies and restructurings and the lack of any formal process for facilitating such cooperation. Its purpose is to make it easier and more cost-effective for an office-holder in one jurisdiction to obtain recognition of his appointment in another jurisdiction. It would seem to be blindingly obvious, given the significant level of Hong Kong cross-border insolvency involving the PRC, other Asian jurisdictions, Europe, Australia and Caribbean jurisdictions such as the BVI and the Cayman Islands, that Hong Kong would stand to benefit from implementing the Model Law.

And yet nowhere does it appear in the Administration’s vocabulary. As things stand at present, cross-border law is developing through the courts, but recent judgments (including the Singularis decision, which although a Privy Council decision and thus not binding in Hong Kong, may well be persuasive in Hong Kong), suggest that recognition of foreign office holders in Hong Kong may become more problematic. If that turns out to be the case, it is increasingly likely that a foreign office holder will be faced with having to commence separate proceedings in Hong Kong with the time delays and increase in costs that will follow.

For the avoidance of doubt, the Model Law is implemented by different jurisdictions in different ways, depending on local requirements. It is not set in stone – in other words, it could be implemented in a manner that would work for Hong Kong without impacting on the independence of the Hong Kong courts. It is this that makes it all the more difficult to understand the failure to address this issue.

The story is that the introduction of the Model Law would be too difficult/too time consuming/not necessary/not appropriate – choose any of these. Regardless of the reasons, it seems that the failure to introduce the Model Law is a lost opportunity and raises the likelihood that, given the lack of speed with which Hong Kong’s legislation is usually updated, it will never be implemented.

Continue reading “C(WUMP)O: The Dark Side” »

Draft CVL Bill Open to Abuse

By Stephen Briscoe

The draft bill was put into the public domain on 10 July with an 18 day period for parties to make representations.  The draft bill runs to 77 pages, whilst the draft notes run to another 20 pages.  To suggest that a draft bill that, (it must be assumed), has been several months in the writing can be properly scrutinised in 18 days in the middle of summer when many of the interested parties are away from Hong Kong is, in polite language, unrealistic.

In itself the draft bill has also thrown up two significant issues, addressed in earlier posts, but now looked at again in more detail in light of the detailed provisions set out in the draft bill.

Meetings of Creditors – CVL

As part of the initial review process, it was clear that amendments needed to be made to s.241 which covers the convening of creditor’s meetings in a creditors’ voluntary liquidation. The problem with the current legislation is that in certain circumstances a meeting of creditors can be held without giving notice to creditors. Clearly an issue that needs to be resolved, the logical solution would seem to be to bring in language to ensure that creditors receive at least seven days notice of a meeting of creditors being held. Such an amendment to the legislation would have two principal benefits. One would be that it would be simple. The second is that by keeping largely intact a system that has worked perfectly well for many years, and which works perfectly well in many other jurisdictions – as they say “if it isn’t broken, don’t fix it”!

Continue reading “Draft CVL Bill Open to Abuse” »

Discharge From Bankruptcy – The Latest

By Rosenna Mak

Although we are still waiting for the Court of Final Appeal to hear arguments regarding the constitutionality or otherwise of the discharge provisions contained in s.30A(10)(a) of the Bankruptcy Ordinance, the Administration has already responded to the decision, see here, by placing before LegCo a draft bill which is aimed squarely at bankrupts who do not cooperate with their Trustee or who abscond from Hong Kong. A copy of the Legislative Council Brief and the draft bill can be seen here.

Under the new proposed provisions, anyone against whom a bankruptcy order has been made will be required to attend personally, and this is the important word, at an initial interview with the Trustee in order to provide sufficient information to enable the Trustee to properly investigate the bankrupt’s affairs.

If the bankrupt fails to attend the initial meeting, the Trustee will be able to apply to the Court for a non-commencement order. The Trustee must make this application within six months of the date of the bankruptcy order, although this period can be extended by the Court on the application of the Trustee. If a non-commencement order is made, the effect will be to stop the running of the bankruptcy period until such time as the bankrupt has provided the Trustee with the information he requires. The significance of this proposal is that the period for which the bankrupt will remain undischarged will not start to operate until such time as the non-commencement order has been set aside, presumably as a result of the bankrupt changing his mind and deciding to cooperate with his Trustee. Continue reading “Discharge From Bankruptcy – The Latest” »

Bankruptcy – The Matrimonial Home

By Nichole Chan

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.

Continue reading “Bankruptcy – The Matrimonial Home” »