Official Receiver v Zhi Charles, formerly known as Chang Hyun Chi, and Joint and Several Trustees of the Estate of Chan Hyun Chi, the Bankrupt (FACV 8/2015)

In the recent case of Official Receiver v Zhi Charles, formerly known as Chang Hyun Chi, and Joint and Several Trustees of the Estate of Chan Hyun Chi, the Bankrupt (FACV 8/2015), the Court of Final Appeal (“CFA”) effectively allowed a bankrupt to walk away scot-free from a debt in excess of HK$255 million just by virtue of his being away from Hong Kong for a sufficiently long period of time. At first glance, this decision may seem shocking and unfair, but in arriving at this decision, the CFA was in fact protecting one of the basic rights enjoyed by Hong Kong residents.

Relevant sections of the Bankruptcy Ordinance

Before going into the facts of the case, it is necessary to highlight the sections of the Bankruptcy Ordinance (Cap 6) (the “Ordinance”) that are dealt with in this case.

Under sections 30A(1) and (2), a bankrupt may be automatically discharged from bankruptcy upon the expiry of certain relevant periods, namely 4 years if he is a first time bankrupt and 5 years if he has been adjudged bankrupt before. This relevant period of bankruptcy commences with the day on which the bankruptcy order is made.

Notwithstanding the above, section 30A(10)(a) of the Ordinance provides that where a bankrupt has left Hong Kong before the commencement of the bankruptcy and has not returned to Hong Kong, the relevant period would not start to run until he returns to Hong Kong and notifies the trustee of his return. As explained below, this is the provision that the Respondent in this case challenged as being unconstitutional.

Background

The Respondent, Charles Zhi (“Zhi”), is a South Korean national who lived and worked in Hong Kong. He obtained Hong Kong permanent resident status in March 2000. In August 2003, he left Hong Kong to live in the United States, where he lived until April 2006. He then moved to South Korea and resided there from early December 2006 to 11 April 2008.

In January 2005, a statutory demand was issued against Zhi in Hong Kong and on 3 July 2006, a petition in bankruptcy was presented. A bankruptcy order was then made on 20 December 2006. Zhi was outside Hong Kong on the date of the bankruptcy order.

On 3 April 2007, trustees of Zhi’s property were appointed (“Trustees”). Two creditors lodged proofs of debt for a total sum of HK$255,190,535.95. Zhi had on numerous occasions visited Hong Kong, but he did not notify the Trustees of his return. In July 2011, the Court granted leave to the Trustees to examine Zhi under section 29 of the Ordinance1, but he failed to attend. On 3 May 2012, the Court issued a prohibition order and a warrant for his arrest. On 10 May 2012, Zhi arrived in Hong Kong and was arrested.

When Zhi was brought to the Master on the following day, he indicated that he wished to challenge the constitutionality of section 30A(10)(a) on the basis that but for that provision, the automatic discharge from bankruptcy conferred by sections 30A(1) and (2) would have taken effect on 21 December 2010, such that he could no longer lawfully be examined under section 29. Zhi applied for a declaration to this effect.

Decisions of the Lower Courts

The Court of First Instance dismissed Zhi’s application. Zhi appealed to the Court of Appeal, which granted a declaration that section 30A(10)(a) was unconstitutional and that Zhi’s bankruptcy had been discharged on 21 December 2010.

The Official Receiver then appealed to the CFA.

Decision of the CFA

To determine whether section 30A(10)(a) was unconstitutional, the CFA examined the well-established sequence of issues to be considered when constitutionality is raised before a Court.

Identification of the constitutional right engaged

It was agreed between the parties that the relevant constitutional rights engaged were Article 31 of the Basic law, which provides that “Hong Kong residents…shall have the freedom to travel and to enter and leave the Region…” and Articles 8(2) and (4) of the Hong Kong Bill of Rights, which provide that “Everyone shall be free to leave Hong Kong” and “No one who has the right of abode in Hong Kong shall be arbitrarily deprived of the right to enter Hong Kong”. Together, these rights were referred to as the “right to travel”.

Whether the constitutional is right restricted

It was contended that a person’s “right to travel” is restricted by section 30A(10)(a) because should he be declared bankrupt during his time outside Hong Kong, the provision would impose a sanction on him such that the relevant period for automatic discharge would not start to run until he returned to Hong Kong and notified the trustee of his return.

The CFA accepted this, but only because the parties in this case had agreed that the “right to travel” included the freedom to stay away from Hong Kong. The CFA stipulated clearly that it proceeded on this assumption, but that this question is still debatable because it was not in fact argued and settled. The CFA declared that a bankrupt who is absent from Hong Kong on the date a bankruptcy order is made against him is not exercising a right to leave Hong Kong because he has already departed. Similarly, should he exercise his right to enter Hong Kong, he would not be subject to any adverse consequence upon entry. It is only if the “right to travel” encompasses a continuous act of staying away from Hong Kong that there can be a link between any sanction attached to being absent from Hong Kong and the exercise of that right.

Whether the restriction of the right is proportional

The parties agreed that the restriction on the right to travel by section 30A(10)(a) is rationally connected to and supports the legitimate societal aim of helping a trustee monitor a bankrupt to facilitate effective administration of his estate. Therefore, the sole question before the CFA was whether the restriction was no more than is necessary to accomplish that aim.

With respect to this, the CFA recognised that there may be a range of reasonable alternatives, and they would not necessarily find the law too restrictive merely because they can conceive of a better alternative that might better tailor objective to infringement. However, the CFA also noted that the law may fail if the government fails to explain why a significantly less intrusive and equally effective measure was not chosen.

Ultimately, the CFA concluded that section 30A(10)(a) is indeed unnecessarily restrictive because it:

  1. operates automatically and without any exception in respect of any bankrupt who is already outside Hong Kong on the day a bankruptcy order is made, even when he is only prevented from returning to Hong Kong due to innocent reasons such as impecuniosity or illness;
  2. applies even where a bankrupt, while outside Hong Kong, is nonetheless ready and willing to cooperate fully with the trustee in the administration of his estate; and
  3. does not vest in the Court any discretion to mitigate or disapply the sanction that arises solely by reason of a bankrupt’s absence from Hong Kong.

For the reasons above, the CFA held that section 30A(10)(a) was unconstitutional and dismissed the Official Receiver’s appeal. It noted the unfortunate consequence of their decision in the present case, but explained that the injustice of absconding bankrupts taking advantage of the period of automatic discharge from bankruptcy cannot justify a provision which catches all bankrupts outside Hong Kong regardless of the circumstances that lead to their being absent from Hong Kong and unable to return.

Implications

Section 30A(10)(a) was part of a scheme established to protect creditors so that the time for automatic discharge of bankrupts outside Hong Kong when a bankruptcy order is made would not start to run until he returns to Hong Kong and notifies the trustee of his return. However, after this case, bankrupts can now “sit out” their bankruptcy period by choosing not to return to Hong Kong until the relevant period expires.

Creditors may be comforted to know that there is currently a Bankruptcy (Amendment) Bill 2015 in the works that envisages a replacement of section 30A(10) with a less draconian regime where a trustee may apply to the Court for a non-commencement order if the bankrupt fails to attend an initial interview or to provide the trustee with information requested. The Bill is currently being reviewed by the Legislative Council and is proposed to commence on 1 November 2016. The Bill will not be retrospective, so until it becomes effective, creditors should be aware that time for automatic discharge would start to run immediately whether the bankrupt is in or outside Hong Kong when declared bankrupt. That said, the current law does allow a trustee to apply to suspend the period of automatic discharge if certain grounds can be made out. Such grounds include, amongst others, that discharge would prejudice the administration of the estate, the bankrupt has failed to cooperate, the conduct of the bankrupt has been unsatisfactory, and the bankrupt has departed from Hong Kong and has failed to return following a request from the trustee to do so.