Dispute Resolution Beijing/Hong Kong/Shanghai Client Alert Creditors Petitioning for Bankruptcy Beware: Absconding Bankrupts May Walk Free After Staying Away from Hong Kong for 4 Years Recent developments The Hong Kong Court of Final Appeal (“CFA”)1 has ruled unconstitutional a provision under the Bankruptcy Ordinance (“Ordinance”) that prevents the period of bankruptcy from commencing when a bankrupt is not in Hong Kong. The relevant section of the Ordinance provides that if a bankrupt is away from Hong Kong at the time of the bankruptcy order, the period of bankruptcy only begins to run when the bankrupt returns to Hong Kong and notifies the trustee of their return. On 5 November 2015, the CFA held that the relevant section is unconstitutional as its infringement on an individual’s right to travel is not proportional to the legitimate societal aim of protecting the rights of creditors. Bankrupts who were away from Hong Kong at the time of the bankruptcy order and who remain so for the period of bankruptcy will now enjoy automatic discharge from bankruptcy based on the passage of time. However, the consequences of the CFA ruling may be short lived as proposed legislative amendments will see the relevant section being replaced by a new arrangement to protect creditors’ rights. Implications for petitioning creditors The Ordinance provides a scheme for automatic discharge from bankruptcy upon the expiry of a certain period of time, which is four years for firsttime bankrupts and five years for repeating bankrupts, or up to eight years if the court determines upon an objection to such discharge by the trustee or creditors. Prior to the CFA decision, the operation of the relevant section meant that creditors petitioning for the bankruptcy of a debtor not present in Hong Kong were assured that the automatic discharge period would not start running until the debtor returned to Hong Kong and fulfilled their obligations to cooperate with the trustee in bankruptcy. Since the CFA decision, petitioning creditors should be aware that the debtor, if declared bankrupt whilst out of Hong Kong, may effectively “wait out” the bankruptcy by choosing not to return to Hong Kong until the period of bankruptcy has expired. This allows absconding bankrupts to enjoy automatic discharge from bankruptcy without fulfilling any of their requisite obligations. Background of the case The appeal concerned the constitutionality of s.30A(10)(a) of the Ordinance, which provides that the relevant period for automatic discharge from 1 Official Receiver v. Zhi Charles, formerly known as Chang Hyun Chi and Another (05/11/2015, FACV8/2015) November 2015 www.bakermckenzie.com Beijing Suite 3401, China World Office 2 China World Trade Centre 1 Jianguomenwai Dajie Beijing 100004, PRC Tel: +86 10 6535 3800 Fax: +86 10 6505 2309 Hong Kong 14th Floor, Hutchison House 10 Harcourt Road Central, Hong Kong Tel: +852 2846 1888 Fax: +852 2845 0476 Shanghai Unit 1601, Jin Mao Tower 88 Century Avenue, Pudong Shanghai 200121, PRC Tel: +86 21 6105 8558 Fax: +86 21 5047 0020 2 Baker & McKenzie | November 2015 bankruptcy shall, in the case of a person who has left Hong Kong before the commencement of the bankruptcy, not start to run until he returns to Hong Kong and notifies the trustee in bankruptcy of his return. The parties having agreed that the relevant subsection infringed the constitutional freedom to travel, the court was left to determine if such infringement was “no more than necessary” for the purpose of protecting creditors’ rights. The respondent was adjudicated bankrupt on 20 December 2006 while he was living in the United States. Due to the operation of the subsection, the respondent’s period of bankruptcy did not begin running as he was overseas and did not return to Hong Kong and inform the trustee of his return. In July 2011, the Court made an order for the respondent’s examination. On 3 May 2012, there was issued a prohibition order and a warrant for his arrest. Upon his arrival in Hong Kong on 10 May 2012, the respondent was arrested and brought the following day to the Court for examination. The respondent then took out a summons to challenge the constitutionality of s.30A(10)(a) on the basis that it infringed an individual’s constitutional right to travel conferred by the Basic Law and the Hong Kong Bill of Rights. The CFA held that s.30A(10)(a) was unconstitutional and stated that it could not justify a provision which catches all bankrupts outside Hong Kong regardless of their reasons for being absent from Hong Kong and unable to return. The CFA’s primary concern was the lack of exception for bankrupts who may be willing to cooperate in full with the trustee whilst outside of Hong Kong and/or who were unable to return to Hong Kong due to wholly innocent reasons such as illness or accidents. The Bankruptcy (Amendment) Bill 2015 The Legislative Council is currently considering the Bankruptcy (Amendment) Bill 2015 (‘Bill”) which proposes to repeal the entire s.30A(10) of the Ordinance (which deals with suspension of the period of bankruptcy under specified circumstances). Instead, the section would be replaced by a regime allowing the trustee to apply to the court for a non-commencement order where the bankrupt fails to attend the initial interview or to provide the trustee with information requested. This new arrangement eliminates the constitutionality concerns of the relevant section and is proposed to become effective on 1 November 2016 if passed. However, as the Bill does not have retrospective effect, any bankruptcy orders granted by the court before the Bill comes into effect will not benefit from its provisions. Actions to consider Creditors will need to be wary of the window between the date of the CFA’s decision and when the new regime comes into effect (likely on 1 November 2016). It is advisable for creditors of debtors who are not in Hong Kong, where possible, to time the presentation of the petition so that the bankruptcy order is granted after the Bill comes into effect. This will ensure that the trustee in bankruptcy may, if necessary, have the right to apply to the court for a non-commencement order against any debtor who does not cooperate with the trustee as required by the Ordinance. Otherwise, bankruptcy orders granted before the commencement of the Bill will operate so that the automatic discharge period starts running regardless of whether the debtor is in Hong Kong or not. Conclusion This is an important development in the bankruptcy regime and it remains to be seen as to how the new section and scheme will operate, including the Court’s approach upon the application by the trustee for noncommencement of the period of bankruptcy. 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