Chapter 2

Some features of extra-judicial

debt collection

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Stages of debt collection

2.1 The debt collection process can usually be divided into three stages:¹

(1) the creditor or an agent acting on his behalf makes informal attempts at collection;

(2) the creditor brings a court action for recovery of the debt; and

(3) the court makes an order for payment, which is followed by attempts at enforcement.

2.2 The whole process of debt recovery may be, and sometimes is, protracted. This protracted process, however, has a useful “filter effect”. At each stage, there should be and are fewer cases than at the previous stage, either because of settlement of the debt or the creditor’s decision to abandon pursuit.² Given the Sub-committee’s terms of reference, this Consultation Paper will examine only the first stage of debt collection. It is, however, useful to bear in mind that the stages of debt collection are inter-related. The effectiveness of the later stages of debt collection have a bearing on an earlier stage. Conversely, if the preliminary stage is ineffective or stifled, more cases would have to continue on to the later stages.

Different types of debt collection activities

2.3 Debt collection activities can be broadly categorised into three types : those which are legitimate, those which include some form of harassment, and, lastly, those which involve activities which are clearly criminal in nature.

2.4 Collection tactics which amount to criminal offences include:

• making threatening telephone calls;

• sending obscene or offensive fax messages;

• jamming glue into door locks of the debtor’s home;

• splashing paint outside the debtor’s home;

• chaining up the door or gate of the debtor’s home;

• obtaining by bribery the debtor’s particulars from public utility companies;

• intimidation;

• false imprisonment;

• assault;

• arson; and

• murder.

2.5 Harassment or nuisance type tactics are often employed to collect debts. Although less dangerous in nature than the clearly illegal debt collection tactics, the use of harassment is widespread and a cause for serious concern in Hong Kong. Examples are:

• pestering the debtor with persistent phone calls;

• embarrassing the debtor by publicising his particulars and information on the outstanding debt;

• sending open faxes to the debtor’s office or workplace; and

• pestering the debtor’s referees, family members and friends either for repayment or information about the debtor’s whereabouts.

2.6 Other improper practices in debt collection include:

• using false names to communicate with the debtor;

• making anonymous calls and sending unidentifiable notes to the debtor to avoid being traced by police;

• switching off any tape-recorder before making abusive or threatening remarks to the debtor; and

• sub-contracting debt collection work to outsiders or gangsters.

Extra-judicial debt collection

2.7 The extra-judicial debt recovery process is sometimes referred to as the pre-action stage or the informal collection stage. In one study³, the following observations were made on extra-judicial debt recovery:

“The vast majority of outstanding debts are collected by the efforts of the creditor himself or his agent without the commencement of an action against the debtor. The principal reason is economic; debt collection by one’s own collection department or by a collection agency is likely to be much cheaper than debt collection by a lawyer. The creditor may steer away from legal action for other reasons, including a desire to keep the debtor as a potential customer, but the cost factor is probably the most important reason for using some form of extra-judicial collection method in preference to an expensive lawsuit.”⁴

2.8 The Creditors Survey⁵ compiled by the Central Research Unit (“the C.R.U. Creditors Survey”) of the Scottish Office yielded similar findings:

“When default in payment of a debt occurs, the creditor usually pursues its recovery by means of ‘informal’ techniques such as reminders or letters threatening legal proceedings. In the early stages, the creditor normally has an interest in retaining the debtor as a customer and will usually be anxious not to dissipate goodwill, at least until more information becomes available on the nature of the default and the debtor’s intentions or ability to pay.”⁶

2.9 The same survey further found that the scale of default which required some form of pursuit varied from one in four of all accounts to one in ten. After creditors have exhausted their own informal recovery procedures, about three-quarters of them passed over the details of the debt to a debt collection agency or a solicitor. Debt collection agencies usually write further letters and may visit the debtor before deciding whether a court action is worthwhile.⁷

2.10 Further, according to the C.R.U. Creditors Survey:

“All creditors said that while their aim was to secure as quick and inexpensive settlement as possible, they wish to retain customers, and they are sympathetic to debtors’ genuine problems, such as bereavement, illness and unemployment. All creditor organisations stressed how difficult it is for them to know the debtor’s circumstances, and that the initiative lies with the debtor to inform the creditor of the reasons for default. All creditors said they were prepared to agree to alternative payment arrangements if the debtor was unable to pay at once.”⁸

2.11 The same view was echoed in a Canadian study which stated:

“Creditors and collectors uniformly say that they are anxious to discover why the debt is not being paid, and if the reason is misfortune or some defence to the claim, this information will be taken into account.”⁹

2.12 Although empirical data was not available, the C.R.U. Creditors Survey found that informal recovery procedures resulted in satisfactory arrangements for payment in the great majority of default debts, and estimated that in many organisations the proportion of default debt cases reaching the court stage was less than 1%.¹⁰

2.13 These studies indicate that the extra-judicial debt collection process is beneficial to society at large. Debts are repaid more speedily without immediate recourse to the judicial system. Considerable public resources can be freed for other causes. In the following paragraphs we examine the factors which contribute to the occurrence of abuse.

What causes abusive debt collection?

2.14 A consumer’s failure to repay a debt may arise from a variety of circumstances. In some cases a consumer may deliberately try to avoid repayment. In others, default arises from over-commitment or changes in financial circumstances resulting from unemployment, business failure, health problems or divorce. Default may also arise because of dispute as to the validity or amount of the debt.¹¹ A study¹² found that the causes of default included initial misjudgement of the ability to repay, the incurring of additional obligations, extravagance by the debtor and, in some cases, plain dishonesty.¹³ Factors which have led to abusive debt collection include -

• the nature of the debt collection process

• the lack of professionalism among some debt collectors

• loose-lending

• economic downturn

• the judicial process in debt recovery.

The nature of the debt collection process

2.15 Debt recovery or collection may involve exerting pressure on the debtor. A collection agency collecting a debt is often more aggressive than the creditor because the collection agency is often retained only after the creditor has made substantial efforts to collect the debt himself. Collection agencies usually charge their clients on a “no collect, no pay” contingency basis. In the event that a debt is successfully collected, the collection agency will retain a percentage of the amount. The percentage may range from 10% to 60%,¹⁴ depending on the amount recovered, the age of the account, and the value of the business between the agency and the client. Since collection agencies charge clients on a contingency basis, individual debt collectors are usually paid a small salary plus commissions or bonuses. An individual debt collector’s monthly remuneration, as well as the agency’s earnings, may therefore depend on the ability to pressure debtors into effecting repayment after debtors have neglected or refused to pay creditors directly. The work of a debt collector is thus not usually pleasant. It has to be result-oriented and is likely to involve high tension.¹⁵

The lack of professionalism among some debt collectors

2.16 Whilst operators in the top-end of the debt collection industry are usually well qualified both in terms of experience and qualifications, surveys indicate there is often a lack of professionalism among other debt collection agencies. In Alberta, for instance, where debt collectors are required to be licensed, there is no educational requirement to become a debt collector.¹⁶ The same survey found that collectors in general have no more than a grade 12 education,¹⁷ and complaints have been received about the absence of training for would-be collectors.

2.17 We are not aware of any formal survey conducted in Hong Kong on the educational level of debt collectors, but a recent newspaper article¹⁸ found that debt collectors come from all walks of life. The background of three debt collectors was considered:

Case No. 1

This debt collector graduated from a Canadian University with a degree in economics in 1997. He was introduced by a friend to a debt collection agency and became a debt collector because he had difficulty finding other jobs. Since he had only six months’ experience in the debt collection business, he was responsible only for collecting small debts. His clients were mainly credit card companies, mobile phone companies and money-lenders. He had a basic salary of five thousand dollars, and would get a commission of three to four per cent of any recovered debt. The amount of commission he received would not exceed one thousand dollars a month on average. His collection method was to phone up the debtors constantly to annoy them, and to use foul language to intimidate them. He claimed he had never employed illegal tactics.

Case No. 2

This debt collector was a Form 5 graduate, and, like the collector in Case No. 1, was introduced by a friend to a debt collection agency because he was unable to find other employment. He had been a debt collector for three years and his average earnings did not exceed seven thousand dollars a month. Although he was eligible for a commission of five to six per cent of the recovered debt, he mentioned that the rate of successful recovery was less than ten per cent given the economic downturn. He admitted he had occasionally resorted to illegal tactics to recover debts. His usual collection tactic was to pay personal visits to the debtors together with two other colleagues.

Case No. 3

This collector has been in the business for ten years and claimed to be a senior member of the debt collection agency. He had a basic salary of eight thousand dollars and a commission of six to eight per cent of the recovered debt. His average monthly earnings amounted to around twenty thousand dollars. He had many ways of obtaining the contact details of debtors, such as bribing the staff of some telephone companies, pager companies and even some government departments. Other sources of information include the Marriage Registry, Companies Registry and car-dealers. This collector usually paid personal visits to the debtors and claimed a success rate of between 10 per cent to 20 per cent. He admitted he had used illegal tactics, and he claimed that debtors were usually reluctant to report them to the police.

Loose-lending

2.18 There is a view that part of the reason for defaults in repayment lies in the availability of easy credit. Certain financial institutions are willing to accept high risks in return for the high profit margin of credit cards and the personal loan business. Some creditors do not exercise sufficient care to ascertain the financial standing or even the solvency of applicants before the loans or credit are granted. An aggressive provider of credit is a danger, not only to the debtor, but also to the debtor’s other creditors whose loans may have been responsibly granted.

Economic downturn

2.19 From the point of view of financial institutions, the increase in repayment defaults is mainly caused by the economic downturn in that customers, who were credit-worthy at the time the credit was granted, may have become unemployed or have suffered pay-cuts. The Australian Law Reform Commission in its Report on Debt Recovery and Insolvency¹⁹ found that the most important cause of non-business debt default was an unexpected change in economic circumstances.

The judicial process in debt recovery

2.20 At the beginning of this chapter, we mentioned that the stages of debt collection are inter-related in that, the effectiveness of the later stages of debt collection have a bearing on that of the preliminary stage; and if the preliminary stage is ineffective, more cases will proceed to the later stages. During the course of the Sub-committee’s deliberation, some members expressed the view that a long-term solution to debt collection problems would be to improve the efficiency of the judicial process both in terms of adjudication and enforcement. This issue will also be discussed later in this Consultation Paper.

Other factors

2.21 We have set out above some factors which contribute towards the occurrence of defaults and may lead to abusive debt collection. There are other factors, such as whether or not there is sufficient legal deterrent against abusive debt collection, and whether or not those deterrents are sufficiently clear. These will be separately examined later.

Chapter 3

Existing criminal sanctions against

abusive debt collection in Hong Kong

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Criminal law sanctions

3.1 In this chapter, we examine various criminal offences which are often applicable to debt collection activities.

Intimidation

3.2 The offence of intimidation is set out in section 24 of the Crimes Ordinance (Cap 200):

“Any person who threatens any other person -

(a) with any injury to the person, reputation or property of such other person; or

(b) with any injury to the person, reputation or property of any third person, or to the reputation or estate of any deceased person; or

(c) with any illegal act,

with intent in any such case -

(i) to alarm the person so threatened or any other person; or

(ii) to cause the person so threatened or any other person to do any act which he is not legally bound to do; or

(iii) to cause the person so threatened or any other person to omit to do any act which he is legally entitled to do,

shall be guilty of an offence.”

3.3 The recent case of R v Chan Kai Hing¹ shows how section 24 applies to debt collection activities. The appellant was a debt collector who, together with another colleague, went to the home of a debtor who owed a bank a sum of money. An argument ensued at the door, and the debtor alleged that the debt collector had uttered a threat that if the debtor did not repay, then the debt collector would set fire to the flat. The debt collector maintained that there was some dispute but no utterance as alleged, and that the visit was a lawful debt collection exercise. The debt collector was convicted by the magistrate of one count of criminal intimidation. The magistrate, however, made some inconsistent remarks concerning the mens rea of the debt collector. At one point, the magistrate said that the debt collectors’ comments were said “in the heat of the moment (and) that there was no premeditation”. Later, on sentencing, the magistrate said that at the time the debt collector made the threats, he made them with the intent of alarming the debtor. Given the inconsistent remarks, the High Court, on appeal, held that there was some doubt as to whether the magistrate had considered the issues raised in the case of R v Lo Tong Kai,² and the court decided to set aside the conviction due to a lurking doubt as to whether the conviction was safe or satisfactory.

3.4 In R v Lo Tong Kai a defendant was convicted of criminal intimidation and sentenced to three months’ imprisonment. The conviction was set aside on appeal because of doubts concerning the extent to which the surrounding circumstances were taken into consideration. McMullin J made some observations on the requirements of section 24:

“To my mind therefore it was of the greatest importance that the court should have considered whether the words used were ‘wild and whirling words’ uttered in exasperation by a man driven beyond the point of endurance by opposition offered to him in his legitimate rights as owner of premises, and signifying nothing more than an instinctive outburst of spleen, or whether they were uttered with a genuine intention of causing fear or were, in the circumstances of their utterance, likely to produce that effect”.³

3.5 While section 24 of the Crimes Ordinance (Cap 200) deals with threats, Section 25 deals with assaults and reads:

“Assaults with intent to cause certain acts to be done or omitted

Any person who beats or uses any violence or force to any person with intent in any such case to cause such person or any other person to do any act which he is not legally bound to do, or to omit to do any act which he is legally entitled to do, shall be guilty of an offence.”

3.6 Any person who is guilty of section 24 or 25 is liable on summary conviction to a fine of $2,000 and to two years’ imprisonment and is liable on conviction upon indictment to five years’ imprisonment.⁴

Criminal damage to property

3.7 If a debt collector damages or destroys property belonging to another, or threatens to do so, such acts are covered by sections 60 and 61 of the Crimes Ordinance (Cap 200):

“60. Destroying or damaging property

(1) A person who without lawful excuse destroys or damages any property belonging to another intending to destroy or damage any such property or being reckless as to whether any such property would be destroyed or damaged shall be guilty of an offence.

(2) A person who without lawful excuse destroys or damages any property, whether belonging to himself or another -

(a) intending to destroy or damage any property or being reckless as to whether any property would be destroyed or damaged; and

(b) intending by the destruction or damage to endanger the life of another or being reckless as to whether the life of another would be thereby endangered,

shall be guilty of an offence.

(3) An offence committed under this section by destroying or damaging property by fire shall be charged as arson.

61. Threats to destroy or damage property

A person who without lawful excuse makes to another a threat, intending that other would fear it would be carried out, -

(a) to destroy or damage any property belonging to that other or a third person; or

(b) to destroy or damage his own property in a way which he knows is likely to endanger the life of that other or a third person,

shall be guilty of an offence.”

3.8 Contravention of these sections carries heavy penalties. A person guilty of arson under section 60 or of an offence under section 60 (2) (whether arson or not) is liable on conviction upon indictment to imprisonment for life, whereas a person guilty under other sections in the same Part is liable on conviction upon indictment to imprisonment for ten years.⁵

3.9 In R v Shum Hon Kai & Another,⁶ arson charges were brought for debt collection activities. The facts concerned a Miss Lau who was the girlfriend of the second appellant. During the course of their relationship, the second appellant lent $7,000 to Miss Lau’s cousin, who did not repay the loan. After the second appellant’s relationship with Miss Lau had ended, he held her responsible for the loan. The second appellant discussed the matter with his friend, the first appellant, and they agreed to set fire to the entrance of Miss Lau’s flat in a multi-storey building. They did so at about 1 am. The first appellant lit the fire while the second appellant acted as lookout. The first appellant burned himself accidentally and suffered serious burns. Both pleaded guilty to the charge of arson but appealed against the sentence of eight years’ imprisonment. The Court of Appeal expressed the view that as the degree of seriousness in arson cases might vary considerably, it would be unwise to lay down any sentencing guidelines. The court did not doubt the seriousness of the offence committed, but said that mitigating circumstances should have been taken into consideration. These included the age of the first appellant, that he surrendered himself and that he pleaded guilty. The first appellant’s sentence was reduced to six years. As for the second appellant, he was already 23 years of age and did not have a clear record. Although he merely acted as the lookout, no distinction was made between him and the first appellant, and he also received a reduced term of six years.

Threats to kill or murder

3.10 Section 15 of the Offences Against the Person Ordinance (Cap 212) stipulates that any person who maliciously sends any letter or writing threatening to kill or murder another shall be guilty of an offence triable upon indictment and shall be liable to imprisonment for ten years.

Theft and blackmail

3.11 The offence of blackmail is said to be usually associated with triad activity,⁷ but it is also applicable to debt collection cases. Since goods obtained by blackmail are to be regarded as stolen goods,⁸ debt collectors who recover debts by blackmail may also be convicted of theft.⁹

3.12 The offence of blackmail is set out in section 23 of the Theft Ordinance (Cap 210):

“(1) A person commits blackmail if, with a view to gain for himself or another or with intent to cause loss to another, he makes any unwarranted demand with menaces; and for this purpose a demand with menaces is unwarranted unless the person making it does so in the belief -

(a) that he has reasonable grounds for making the demand; and

(b) that the use of the menaces is a proper means of reinforcing the demand.”

3.13 The elements of the offence are that there must, first, be a demand, which can be expressed or implied.