Section 30A(1) of the Bankruptcy Ordinance (Cap. 6) (the “BO”), provides that the bankruptcy period, for a person who has been adjudged bankrupt for the first time, runs for four years. However, section 30A(4) of the BO provides eight grounds upon which the Court, on the application of the trustee in bankruptcy or a creditor, can order the suspension of a bankruptcy period – in effect lengthening the period of bankruptcy.

Common grounds on which objections are made to discharge include the bankrupt failing to co-operate in the administration of the estate, the conduct of the bankrupt being unsatisfactory, or where a discharge from bankruptcy would be prejudicial to the administration of the estate. The Court can order a suspension of the period of bankruptcy for a period of up to four years.

The vast majority of cases applying the principles in section 30A(4) of the BO involve bankrupts who have not co-operated at all with the trustees, or whose transgressions are relatively trivial. In Re Lee Raymond Cho Min; Re Lee Priscilla Hwang [2014] HKCU 1114, however, the Court of Appeal applied the principles applicable to suspension of bankruptcy periods in the context of the bankruptcies of two individuals who had provided some level of co-operation with the Trustees.

Background

Raymond and Priscilla Lee, husband and wife and founders of Oasis Hong Kong Airlines, were made bankrupt on 31 August 2009. Near the end of their four year bankruptcy periods, their Trustees applied under section 30A(3) of the BO for an order suspending their discharge from bankruptcy on the basis that their conduct, both before and after the  bankruptcy orders, had been unsatisfactory and  they had failed to co-operate with the Trustees in the administration of their estates. 

In May 2014 Master Hui found that five of the seven complaints advanced by the Trustees were evidence of the Lees’ unsatisfactory conduct and/or failure to co-operate in the administration of their estates, and ordered suspensions of bankruptcy periods of eighteen months for Mr. Lee and fifteen months for Mrs. Lee. The Lees appealed to the Court of Appeal, who in July 2014, ruled that four of the five complaints amounted to non-cooperation or unsatisfactory conduct and that the periods of suspension imposed by the Master should remain undisturbed.

The Law

The Court of Appeal summarised the two-stage test applicable to applications for suspension of discharge from bankruptcy:-

  1. the Court should first determine whether one or more of the grounds mentioned in section 30A(4) of the BO has been established; and
  2. if so, the Court should then consider whether or not, in the exercise of its discretion, a suspension of discharge should be ordered having regard to all the circumstances of the case, and bearing in mind the two main objectives of the BO, which are (a) the rehabilitation of the bankrupt and (b) the public interest in ensuring that the return of the bankrupt to the commercial world would not carry with it an unacceptable risk to persons who may be engaged in commercial relations with him.

The Court of Appeal confirmed that if the conduct complained of is pre-bankruptcy order conduct, suspension may only be ordered if such conduct was grave, but it need not be “exceptionally” grave.  As to what constitutes “unsatisfactory” pre-bankruptcy order conduct, the Court of Appeal adopted the test of whether society would be prepared to condone such conduct without any expression of disapproval.

Unsatisfactory pre-bankruptcy order conduct: Expenses Payment Scheme

The pre-bankruptcy conduct complained of by the Trustees against the Lees related to payment of HK$5m from the Lees’ joint bank account, by way of “loan” to a company they controlled. The company then used some of the money to pay the Lees’ personal expenses of at least HK$1.6m, making most payments after presentation of the bankruptcy petition.

The Court of Appeal applied the above two-stage test and found that, in the absence of any explanation, the Lees’ use of this expense payment scheme fell within the definition of “unsatisfactory” pre-bankruptcy order conduct under section 30A(4)(d) of the BO. The Court of Appeal ruled that the Lees’ use of the company “as a channel to pay for their personal expenses was clearly designed so that they could use the funds for their own benefit, and to put them out of the reach of the general body of creditors”. The Court also stated that they did not think that “society would be prepared to condone payments for personal benefits (including domestic and travelling expenses) when petitions for bankruptcy had already been presented”.

Unsatisfactory conduct and failure to co-operate: conduct of bankrupts outside jurisdiction

A key complaint made by the Trustees involved the Lees’ post bankruptcy conduct outside the jurisdiction. The Lees had substantial assets in the US, in the form of shares in property holding companies and bank accounts. As a result, the Trustees issued a Chapter 15 application and subsequently a turnover motion in the US Court to try to preserve the Lees’ US assets and ensure the vesting of the Lees’ US equity interests in the Trustees.

Instead of co-operating with the Trustees, the Lees actively resisted the Trustees’ moves in the US by adopting the same stance as the US companies and filing oppositions to the Trustees’ applications. The Lees argued that they were minority shareholders and so their opposition was justified because they owed a fiduciary duty to other shareholders to adopt the same position.

The Court of Appeal recognised the Trustees’ statutory right under section 55 of the BO to collect in a bankrupt’s foreign property. Further, the Court of Appeal noted that pursuant to section 26(3) of the BO, there is a statutory duty on a bankrupt to assist trustees “to the utmost of his power” in the realization of property. This is a positive duty such that not only should a bankrupt not resist trustees in their efforts to collect in his assets, but he fails in his statutory duty if he remains inactive when called upon to act. 

The Court of Appeal ruled that the Lees’ actions in the US proceedings were relevant to the suspension applications, and that it was clear that they did not assist the Trustees, nor even stay neutral, but instead sought to challenge the Trustees’ actions. This had made the Trustees’ work onerous and led to more costs being incurred in the administration of the estates. Accordingly, the Court of Appeal upheld the Master’s finding that the Lees had failed to co-operate with the Trustees in relation to the US assets and that their conduct was unsatisfactory.

The Court of Appeal also upheld the Master’s decision that two other aspects of the Lees’ conduct – Mr. Lee's change of position in relation to a debt owed to him and the failure to provide documents to the Trustees relating to the Lees’ income – were unsatisfactory and amounted to a failure to cooperate. The Court felt, however, that the Master’s view that Mr. Lee’s failure to provide a copy of a settlement agreement to the Trustees was unsatisfactory conduct, was incorrect, but saw no reason to disturb the Master’s exercise of discretion in relation to length of suspension of bankruptcy periods.

Conclusion

The Court of Appeal’s decision clearly states the test that the Court should adopt when deciding whether to order a suspension from discharge of bankruptcy under section 30A(3) of the BO, as well as providing guidance on the length of suspension that will be imposed where a bankrupt provides some level of cooperation but still obstructs the trustees in other respects. The decision shows that the activities of bankrupts in the pre-bankruptcy period and in jurisdictions other than Hong Kong can be grounds on which a suspension can be ordered, and that the Court may be prepared to regard the bankrupt’s duty to co-operate with a Hong Kong trustee as overriding any supposed duties that may be upon them under foreign law.