THE LAW REFORM COMMISSION OF HONG KONG



REPORT ON BANKRUPTCY



CONTENTS




Chapter Page



Introduction

Terms of Reference

Summary of Work

Abbreviations




THE BANKRUPTCY ORDINANCE (CAP 6)



1. Grounds for presenting a bankruptcy petition


The present law

Abolition of acts of bankruptcy

Failure to comply with a statutory demand

Unsatisfied execution of a judgment debt

Absconding debtors

Expediting the presentation of the petition

Individual voluntary arrangements

Recommendations


2. Jurisdiction of the court


The present law

Widening the jurisdiction

Having assets in Hong Kong at the date of the bankruptcy order

Benefit accruing

Bankruptcy jurisdiction

Recommendations


3. Minimum Debt

The Present Law

Individual employees

Net minimum debt amount

Debtor's petition

Recommendations


4. Petitioner's Statutory Deposit


The Present Law

Reduction in the amount of the statutory deposit

Summary procedure

Adjustment of the statutory deposit

Recommendations


5. Bankruptcy orders


The Present Law

Single bankruptcy order

Consumer debtors

Secured creditors

Interim receiver

Proceedings against a bankrupt

Recommendations


6. Individual Voluntary Arrangements

The present law

Effect of recommendation for single bankruptcy order

Insolvency practitioners

The voluntary arrangement procedure

Recommendations


7. Annulment of the Bankruptcy Order


The present law

Power of the court to annul a bankruptcy order

Annulment after discharge

Advertising and gazetting of annulment

On the application of any person interested

The 15 per cent rule

Individual voluntary arrangements

Recommendations


8. Meetings of Creditors


The present law

Discretion in the Official Receiver whether to hold a first meeting

Meeting at the request of creditors

Quorum

Consolidation of provisions in the Bankruptcy Ordinance

Recommendations


9. Creditors’ committee and the control and duties of the trustee


The present law

Creditors' committee

Meetings only when necessary and agreed

Representation by letter of authority

Resolutions by post

Control of the Official Receiver or trustee

Powers of the trustee with or without the sanction of the committee

Disagreements between the committee and the trustee

The trustee's duties

Recommendations


10. Statement of affairs


The present law

Time for submission of the statement of affairs

Dispensing with the statement of affairs

Extension of time for submission of the statement of affairs

Contempt of court

Form of statement of affairs

Recommendations


11. Public Examination


The present law

Self incrimination

Legal representation

Public examination only when necessary

Rights of creditors

Confidentiality of the trustee's report

Creditors to supply the Official Receiver with a list of questions

Costs

Perjury on examination

The Northern Irish procedure

Record of the Examination

Minority view

Recommendations


12. Private Examination


The present law

Self incrimination

Extent of the examination

Legal representation

Solicitor - client privilege

Examination of the bankrupt or the bankrupt's spouse

dmission by the respondent of indebtedness to or possession of property

belonging to the debtor

Inter partes and ex parte applications for private examination

Submission of affidavits and delivery of documents by the respondent Interrogatories

Confidentiality of a trustee's report

Payment of costs of the examination by a respondent

Power of court to order an Inland Revenue Official to produce tax

documents of the bankrupt

Perjury on examination

Recommendations


13. Bankrupt’s property divisible among creditors


The present law

The $3,000 monetary limit

The tools of a bankrupt's trade or business

Proposal for a voluntary arrangement

Business related bankruptcy

Non-business related bankruptcy

Domestic needs

The family home

Reputed ownership

Property acquired by a bankrupt after bankruptcy

Recommendations


14. Relation back of the trustee’s title


The present law

Recommendations


15. Proof of debt


The present law

Foreign currencies

Tort claims

Fines and penalties

Confiscation of assets

Minority view

Swearing of proofs of debt and false proofs of debt

Admission of claims

Recommendations


16. Declaration and distribution of dividends

The present law

Recommendations


17. Discharge


The present law

Automatic discharge

Objection to and suspension of automatic discharge

Length of time objections should subsist

Subsequent bankruptcy

Early discharge

Transitional

Recommendations


18. Statutory undertakings

The present law

Individual voluntary arrangements

Recommendations


19. Interest on debts


The present law

Section 71(1) : The interest limitation rule

Creditors who are not entitled to claim interest

Section 71(2)(a) to (c)

Guarantors

Third party security

Extortionate credit transactions

Recommendations


20. Summary of recommendations



Annexures


Annexure 1 :Adjudications and dividends declared


Annexure 2 :General Bankruptcy Statistics



INTRODUCTION



Terms of reference


1. On 14th September 1990, under powers granted by the Governor-in-Council on 15 January 1980, the Attorney General and the Chief Justice referred the following topic to the Law Reform Commission:


"(1) To review the law and practice relating to the insolvency of both individuals and bodies corporate in Hong Kong, and in particular-


(a) the provisions of the Bankruptcy Ordinance, Chapter 6, in their application both to business and non-business debtors; and


(b) the winding-up provisions of the Companies Ordinance, Chapter 32


taking into account existing and proposed legislation in other jurisdictions, and in particular the UK Insolvency Act 1986 and Chapter 11 of the U.S. Bankruptcy Code, and to consider what reforms are necessary or desirable.


(2) To submit an early interim report on -


(a) such changes in the Bankruptcy Ordinance as are considered to be required for simplifying bankruptcy procedures, and


(b) any other aspects of insolvency law or practice which the Commission considers should be introduced in advance of the Commission's final report."


2. The Law Reform Commission appointed a sub-committee to examine this topic, chaired by Professor Edward L G Tyler, Professor and Head of Department of Professional Legal Education at the City University of Hong Kong and a former member of the Law Reform Commission. The other members of the sub-committee are:


Mr Mark Bradley, Solicitor, Deacons


Mr Graham Cheng OBE JP, Chairman, Taching Petroleum Co Ltd


Mr Cheung Wood-lun, Secretary, Hong Kong & Kowloon Cement & Concrete Construction Trade Workers

(resigned in February 1993)


Mr Nicholas Etches, Accountant, KPMG Peat Marwick


Mr Stefan Gannon, General Counsel to the Hong Kong

Monetary Authority


Mr David Hague, Accountant, Price Waterhouse

(appointed in January 1993)


Mr Robin Hearder JP, Official Receiver


Ms Barbara Martin, Solicitor, Carey & Lui

Mr Michael Page, Senior Manager, Hong Kong & Shanghai Banking Corporation Ltd


Mr Winston Poon, Barrister


Mr Ian Robinson, Accountant, Ernst & Young


3. The Secretary to the sub-committee was Jeremy Glen, Senior Solicitor in the Official Receiver's Office, who was seconded to the Law Reform Commission for the purposes of this report and who was responsible for the task of drafting the sub-committee report which forms the basis of this Commission report. We record here our appreciation of the immense amount of hard work devoted to this project by the members and secretary of the sub-committee. This report addresses part (2)(a) and certain aspects of part 2(b) of the terms of reference. The sub-committee is now working on some of the other aspects of the reference and the Commission expects to issue two further reports in due course before the reference is complete.



Summary of work


4. The sub-committee held its first meeting on 12th November 1990 and met a total of 53 times in completing its report on bankruptcy.


5. The sub-committee concentrated on consideration of aspects of the Bankruptcy Ordinance which the Official Receiver had originally referred to as requiring amendment. In addition to the Official Receiver's proposals, the sub-committee received submissions on other aspects of the Bankruptcy Ordinance and some of these have been incorporated in this Report.


6. In August 1993, the sub-committee issued a Consultative Document1, setting out its initial proposals on bankruptcy. The submission period lasted for ten weeks to the middle of October 1993 and the sub-committee received over seventy responses. Twenty of these were substantive with wide ranging comment on the topics addressed in the Consultative Document. It is fair to say that, while reservations were expressed about certain issues, the Consultative Document was generally welcomed.


7. The sub-committee’s final report was considered by the Commission at four meetings, from December 1993 to March 1994. The final text of this Report was agreed in March 1995 after some outstanding issues were resolved. Where the conclusions in this final Commission report differ from those of the sub-committee, we have endeavoured to make this clear.


8. The Bankruptcy Ordinance (Cap 6) is almost entirely based on the Bankruptcy Act of 1914 in England and Wales. The Bankruptcy Act 1914 was replaced in 1986 by the Insolvency Act 19862 which was the result of a Report of the Review Committee on Insolvency Law and Practice, commonly referred to as "the Cork Report".3 In 1988 the Law Reform Commission of Australia published a Report on its General Insolvency Inquiry, commonly referred to as "the Harmer Report".4 The Harmer Report has led to some amendments having recently been made to bankruptcy law in Australia under the Bankruptcy Amendment Act 1991 and to the new Corporations Law5.


9. The changes in the laws of bankruptcy and the different attitude towards bankruptcy, with greater emphasis on rehabilitation rather than punishment, brought out in the Cork and Harmer Reports makes it opportune for bankruptcy law to be reconsidered in Hong Kong. While not ignoring other jurisdictions we have been influenced by the changes in both England and Wales and Australia and have sought to adapt them to the best advantage of Hong Kong. We acknowledge that weight has been given to the provisions of the Insolvency Act. We view this as a positive approach as we see no advantage in ignoring the body of case law that is building up around the Insolvency Act. At the same time, we have adopted provisions from other jurisdictions when we have considered them to be more appropriate. We would note that throughout this Report we make recommendations based on provisions in other jurisdictions, in particular the Insolvency Act and the Australian Bankruptcy Act 1966, as amended6. We have not referred to all the supporting rules in the legislation relating to each recommendation but we wish to emphasise that it is our general intention that the relevant supporting rules be adopted in respect of each recommendation.


10. The Commission has taken account of the socio-economic background of bankruptcy in Hong Kong and has considered the statistics available through the Official Receiver's Office.7 We have also considered the policy aspects of bankruptcy law. Both the Cork and Harmer Reports have set out the general position and we do not need to repeat it for the purposes of this Report.8





Abbreviations


11. For the sake of brevity, when we refer to “he” we mean “he or she” unless the context implies otherwise. For the sake of conciseness, we have used abbreviated forms in respect of the following reports and legislation.


“The Consultative Document”


The paper issued in August 1993 by the Insolvency sub-committee of the Hong Kong Law Reform Commission containing the sub-committee’s preliminary proposals on bankruptcy reform.



“The Cork Report”


The Report of the United Kingdom Review Committee on Insolvency Law and Practice under the Chairmanship of Sir Kenneth Cork.9



“The Companies Ordinance”


This refers to the Hong Kong Companies Ordinance (Cap 32).



“The Harmer Report”


General Insolvency Inquiry: a Report of the Law Reform Commission of Australia under the Chairmanship of Mr Ron Harmer.10



“The Insolvency Act”


This refers to the United Kingdom Insolvency Act of 1986.



“The Insolvency Rules”


This refers to the United Kingdom Insolvency Rules of 1986.



“The sub-committee”


This refers to the Law Reform Commission’s Insolvency Sub-committee.

CHAPTER 1


GROUNDS FOR PRESENTING A BANKRUPTCY PETITION



The present law



1.1 When a debtor commits an act of bankruptcy that act entitles a creditor to present a petition to the court for a receiving order to be made against the debtor for the protection of the debtor's estate. The interpretation section of the Bankruptcy Ordinance defines "available act of bankruptcy" as "being any act of bankruptcy available for a bankruptcy petition at the date of the presentation of the petition on which the receiving order is made".11


1.2 The Bankruptcy Ordinance sets out the ways in which a debtor can commit an act of bankruptcy. Section 3(1) reads as follows:


"A debtor commits an act of bankruptcy in each of the following cases -

(a) if in Hong Kong or elsewhere he makes a conveyance or assignment of his property to a trustee or trustees for the benefit of his creditors generally;


(b) if in Hong Kong or elsewhere he makes a fraudulent conveyance, gift, delivery or transfer of his property or of any part thereof;


(c) if in Hong Kong or elsewhere he makes any conveyance or transfer of his property or any part thereof, or creates any charge thereon, which would be void as a fraudulent preference if he were adjudged bankrupt;


(d) if with intent to defeat or delay his creditors he does any of the following things, namely, departs out of Hong Kong, or being out of Hong Kong remains out of Hong Kong, or departs from his dwelling-house or usual place of business, or otherwise absents himself, or begins to keep house, or removes his property or any part thereof beyond the jurisdiction of the court;


(e) if execution against him has been levied by seizure of his goods under process in an action, or proceeding in the court, and the goods have been either sold or held by the bailiff for 21 days;


Provided that, where an interpleader summons has been taken out in regard to the goods seized, the time elapsing between the date at which such summons is taken out and the date at which the proceedings on such summons are finally disposed of, settled or abandoned shall not be taken into account in calculating such period of 21 days;


(f) if he files in the court a declaration of his inability to pay his debts or presents a bankruptcy petition against himself;


(g) if a creditor has obtained a final judgment or final order against him for any amount, and execution thereon not having been stayed, has served on him in Hong Kong or, by leave of the court, elsewhere, a bankruptcy notice under this Ordinance, and he does not, within 7 days after service of the notice, in case the service is effected in Hong Kong, and in case the service is effected elsewhere, then within the time limited in that behalf by the order giving leave to effect the service, either comply with the requirements of the notice or satisfy the court that he has a counter-claim set off or cross demand which equals or exceeds the amount of the judgment debt or sum ordered to be paid, and which he could not set up in the action in which the judgment was obtained or the proceedings in which the order was obtained;


For the purposes of this paragraph and of section 4, any person who is for the time being entitled to enforce a final judgment or final order shall be deemed to be a creditor who has obtained a final judgment or final order;


(h) if the debtor gives notice to any of his creditors that he has suspended or that he is about to suspend payment of his debts."



Discussion


Abolition of acts of bankruptcy


1.3 The Official Receiver proposed that Hong Kong should abolish acts of bankruptcy and replace them with provisions based on the Insolvency Act.12


1.4 The Official Receiver proposed that a statutory demand need not issue out of the court and that both the form and rules in relation to the statutory demand as provided for in the Insolvency Act be adapted for use in Hong Kong.13 The Official Receiver noted that the present form of petition would need to be examined and amended to take account of the recommended changes.


1.5 The concept of acts of bankruptcy is a term of art which not only forms the basis on which a petition is grounded but also has other consequences within the Bankruptcy Ordinance. If our recommendation to abolish acts of bankruptcy is followed it will necessitate changes to other parts of the Bankruptcy Ordinance, such as to the jurisdiction of the court 14 and to the doctrine of relation back.15 The concept of acts of bankruptcy has been described in the following terms:


"The commission by the debtor of at least one act of bankruptcy is the fact which gives the bankruptcy court jurisdiction to make a receiving order in respect of his estate and is to be treated as a statutory recognition of his insolvency. Such an act of bankruptcy must be proved to have been committed within three months before the presentation of the petition [section 6(1)(c)], and any act so proved must be recited in the receiving order. It is to the date of the first of such acts that the title of the trustee in bankruptcy relates back under (section 42)."16


1.6 The Cork Report recommended the complete abolition of the concept of acts of bankruptcy, commenting:


"Most of them (acts of bankruptcy) are obsolete or obsolescent; their abolition will greatly simplify and modernise the law of bankruptcy. If the position is analyzed, it will be found that, with the exception of the debtor's failure to comply with a bankruptcy notice, none of them is needed in order to enable a creditor to present a bankruptcy petition in a proper case. Every creditor who wishes to initiate insolvency proceedings against a debtor must allege and prove that he is a creditor and, except in the cases of future and contingent or prospective debts, this involves alleging and proving that the debtor has failed to pay a debt presently due to the applicant and not bona fide disputed on reasonable grounds. Such failure on the part of a corporate debtor has always been sufficient to justify the conclusion that the debtor is insolvent and ought to be wound up."17


1.7 There is already provision in Hong Kong under the Companies Ordinance18 for a statutory demand not grounded on a judgment debt. The Companies Ordinance provision is closer to the terms of section 267 of the Insolvency Act than to the terms of section 3(1) of the Bankruptcy Ordinance. Section 178(1) of the Companies Ordinance provides that:


"(1) A company shall be deemed to be unable to pay its debts -


(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding $5,000 then due, has served on the company, by leaving it at the registered office of the company, a demand under his hand requiring the company to pay the sum so due, and the company has for 3 weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; or


(b) if execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or


(c) if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company."


1.8 In England and Wales, the Insolvency Act, section 267(2), provides that a creditor's petition in bankruptcy may be presented to the court in respect of a debt or debts only if, at the time that the petition is presented:


"(a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the bankruptcy level,


(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured,


(c) the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay, and


(d) there is no outstanding application to set aside a statutory demand served (under section 268 below) in respect of the debt or any of the debts."


1.9 Section 268 of the Insolvency Act defines "inability to pay" in the following terms:


"(1) For the purposes of section 267(2)(c) the debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and either-


(a) the petitioning creditor to whom the debt is owed has served on the debtor a demand (known as the statutory demand) in the prescribed form requiring him to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least 3 weeks have elapsed since the demand was served and the demand has been neither complied with nor set aside in accordance with the rules, or


(b) execution or other process issued in respect of the debt on a judgment or order of any court in favour of the petitioning creditor, or one or more of the petitioning creditors to whom the debt is owed, has been returned unsatisfied in whole or in part.


(2) For the purposes of section 267(2)(c) the debtor appears to have no reasonable prospect of being able to pay a debt if, but only if, the debt is not immediately payable and -


(a) the petitioning creditor to whom it is owed has served on the debtor a demand (also known as “the statutory demand”) in the prescribed form requiring him to establish to the satisfaction of the creditor that there is a reasonable prospect that the debtor will be able to pay the debt when it falls due,


(b) at least 3 weeks have elapsed since the demand was served, and


(c) the demand has been neither complied with nor set aside in accordance with the rules."


1.10 In addition to the provisions of the Insolvency Act we also looked at the law in other jurisdictions. In particular, we were influenced by the Harmer Report in identifying the grounds on which a petition may be presented to the court.19


1.11 We agree with the Official Receiver and recommend that acts of bankruptcy should be abolished. The situation in Hong Kong is much the same as that described in the Cork Report in that many of the acts of bankruptcy are never used. There is a need to redefine the basis on which a petition can be presented with emphasis on the particular needs of Hong Kong. We are not breaking new ground here but accept that the Cork and Harmer Reports have correctly identified that acts of bankruptcy are obsolete. We have been concerned with identifying the circumstances which should replace the existing acts of bankruptcy and in our discussions we drew on the Insolvency Act and the Harmer Report.


1.12 We identified three of the present acts of bankruptcy that are currently used in Hong Kong as grounds on which to base a petition. These are the failure by a debtor to comply with the terms of a bankruptcy notice (statutory demand), the unsatisfied execution of a judgment debt, and the absconding debtor.

Failure to comply with a statutory demand


1.13 The Harmer Report stated that 95 per cent of cases of acts of bankruptcy were achieved by the non-compliance of the debtor with a bankruptcy notice.20 Practitioners on the insolvency sub-committee were of the view that this figure probably reflects the position in Hong Kong although there are no statistics available.


1.14 The Harmer Report dealt in some depth with the advantages and disadvantages of whether a demand should be supported by a judgment. The principal advantages of not having a demand based on a judgment were summarised as being that it would simplify procedures, reduce the cost and time involved in fulfilling the present requirements and enable suspected insolvents to be flushed out and addressed at an earlier time than is possible under the existing procedure, with all of which we agree. The Harmer Report felt that these advantages would be outweighed by instances where debtors fail, for whatever reason, to resist a statutory demand even though there may be a genuine dispute. The Harmer Report added that the time and cost of first obtaining a judgment before issuing a bankruptcy notice would at least ensure that a debtor is given a fair opportunity to resist a claim. The Harmer Report recommended that a statutory demand should be supported by a judgment debt.21


1.15 We are inclined to give more weight to the advantages identified by the Harmer Report. The concerns expressed in the Harmer Report do not seem to have been reflected by experience under the Insolvency Act and the Companies Ordinance, both of which provide for a statutory demand that is not based on a judgment. We are persuaded therefore that the immediacy of a demand not based on a judgment debt would be a potent weapon for creditors and recommend the introduction of a form of demand that would require a debtor to pay a debt or to secure or compound for it within 21 days of service of the demand and the failure to satisfy such demand should be a ground for presenting a bankruptcy petition.


1.16 We approve of the terms of the Insolvency Rules, rule 6.5(4), which provides that the court may set aside a demand if:


"(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; or


(b) the debt is disputed on grounds which appear to the court to be substantial; or


(c) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 6.1(5)22 is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or


(d) the court is satisfied, on other grounds, that the demand ought to be set aside."


1.17 Cases where there is a dispute on the debt are usually dealt with on the hearing of a bankruptcy petition. The Insolvency Rules advance the hearing of a dispute based on the grounds set out in rule 6.5(4) to a time before the hearing of the petition.23 There is no evidence that the changes effected by the Insolvency Act have increased the amount of litigation about disputed debts and accordingly we recommend the adoption of rules 6.1 to 6.5 of the Insolvency Rules.


Unsatisfied execution of a judgment debt


1.18 We have no difficulty in recommending that the unsatisfied execution of a judgment against the property of a debtor should also be an event on which a bankruptcy petition can be grounded.


Absconding debtors


1.19 Section 3(1)(d) of the Bankruptcy Ordinance is a seldom used act of bankruptcy. It provides, inter alia, that a debtor commits an act of bankruptcy if with intent to defeat or delay his creditors he departs out of Hong Kong, or, being out of Hong Kong, remains out of Hong Kong.


1.20 The sub-committee on insolvency considered that a refinement of the provision could prove useful to creditors and proposed in the Consultative Document that:


"a petition may be presented in respect of a debt if at the time the petition is presented a debtor intends to depart or has departed out of Hong Kong knowing that a necessary consequence of his departing would be to defeat or delay his creditors notwithstanding that his absence from Hong Kong had nothing to do with his debts".


1.21 The Consultative Document stated that the removal of assets out of Hong Kong into China was causing concern and that, with the trend towards the manufacturing base moving into China it was likely that the problem would increase. Practitioners on the sub-committee advised that in some cases assets were flagrantly removed from the jurisdiction, leaving no assets for creditors to claim against.


1.22 In addition, the sub-committee noted that with the approach of the change of sovereignty in 1997, there were instances of individuals accumulating debts in Hong Kong who had no intention of repaying them, in the knowledge that they intended to emigrate. The sub-committee's understanding was that absconding was a common event and that credit card companies had been hit by debtors running up large bills against their credit cards and then leaving Hong Kong. At our request, an attempt was made to gather evidence of such instances. The result of this investigation was that, while there was plenty of anecdotal evidence of such happenings, most of the banks and professional organisations canvassed were unwilling or unable to provide a convincing body of hard evidence.


1.23 The sub-committee also believed that the outward looking and international nature of Hong Kong (reflected, for example, by the absence of exchange control regulations) acted against creditors and left them more exposed to the easy movement of all kinds of assets out of the territory by debtors who wanted to avoid their obligations.


1.24 The Consultative Document proposal prompted several submissions. We were advised that, while there was support for the proposal, there were also reservations expressed that the proposal would be open to abuse by creditors who could, on spurious grounds, seek to prevent a debtor leaving Hong Kong. The sub-committee did not believe that this would be likely to happen as any creditor who abused the provision would incur the displeasure of the court and would be open to the sanction of costs being awarded against him.



Consequences of the presentation of a petition


1.25 There is no doubt that the very act of presenting a bankruptcy petition is capable of triggering a solvency crisis and causing serious harm to an individual's financial position, business and reputation. All those whose business involves extending credit to individuals could be expected to act as soon as a petition was advertised as having been presented against one of their customers. They would be likely to cut off any further credit and to demand immediate repayment since they may otherwise be left behind in a scramble of creditors for the apparently insolvent person's available assets. Once such a scramble began, it would be very difficult to stop. If the individual was a trader, his trading partners would be likely to refuse to supply him with any further goods or services on credit and to call in any trade debts. He would be likely to lose any new business deals being negotiated. Even if he was able to overcome the problem, his subsequent credit rating would be likely to suffer merely because a petition was presented.



An opportunity to pay


1.26 Under the present law, a petition can only be presented where a debtor commits an act of bankruptcy. Acts of bankruptcy involve situations where a debtor acknowledges his own insolvency, the creditor can show that the debtor is dishonestly trying to defeat his creditors, or the debtor has been successfully sued to judgment but has not satisfied the judgment debt. These are plainly cases where the debtor has had a fair opportunity to pay the debt but has proven himself unable or unwilling to do so. Moreover, in the cases where he has been successfully sued to judgment, it is established that the debt cannot lawfully be disputed.


1.27 The proposed ground would not require a creditor to believe that a debtor was insolvent, nor would a creditor need to believe or assert that the reason for a debtor's leaving or absence was to evade or delay repayment. It would not be necessary to prove these matters. It would be sufficient to show knowledge on the part of a debtor that a necessary consequence of departure would be to defeat or delay creditors, no matter that there was some compelling reason for leaving Hong Kong. The rationale is that a debtor would know perfectly well whether the effect of departure would result in loss to creditors.


1.28 The proposed ground would not provide the safeguard of a prior statutory demand or judgment or other notice to the debtor before the creditor would be allowed to issue the petition. The ground would not require the creditor to believe that a debtor was insolvent, merely that he was likely to delay repayment, nor would the creditor need to believe or assert that the reason for the debtor's leaving or absence was to evade or delay repayment. It is specifically proposed that the ground should be available notwithstanding that his absence from Hong Kong had nothing to do with his debts.


1.29 A petition may be issued even where a debtor was still in Hong Kong if the creditor had grounds to believe that a debtor intended to depart realising that his absence would inevitably delay payment of the debt. Hence, if the creditor was mistaken or malicious, the damage done by presenting the petition without prior warning would occur before a debtor could demonstrate that he was willing and able to pay.



Where the debtor has already departed from Hong Kong


1.30 It is arguable that if a debtor had already made good his escape with all his assets a subsequent bankruptcy order leading to the appointment of a trustee in bankruptcy would be in vain if there were no assets on which to operate. This, however, applies as much to any other set of circumstances where an adjudication order is made against a bankrupt. The truth in many bankruptcies is that creditors do not know the extent of a debtor’s assets until the trustee in bankruptcy has had an opportunity to investigate the estate. Even if a petitioning creditor knows that a debtor has certain assets, he is unlikely to know the extent of the debtor’s liabilities.


1.31 Where a bankrupt has fled, the remedy pursued by a creditor could be influenced by the level of judicial co-operation between Hong Kong and the country to which he had gone. Thus, if the other country had an arrangement with Hong Kong for the reciprocal enforcement of judgments or if, by its conflict of laws rules, it recognised Hong Kong judgments on debts incurred in Hong Kong, then it might be more effective to obtain judgment by default in Hong Kong and then to enforce it against the debtor in the other country, executing against his assets there.


1.32 Alternatively, it may be desirable to instruct lawyers in the other country to sue the debtor there, assuming that actions based on debts incurred in Hong Kong are permitted, perhaps in order to restrain him from further removing his assets and so to facilitate execution in that country. If various creditors brought such actions, bankruptcy proceedings in the other jurisdiction may be appropriate.


1.33 If judicial co-operation was such that a trustee in bankruptcy appointed by the Hong Kong court would be recognised in the other country, then Hong Kong bankruptcy proceedings might in some cases be useful. However, this can be done on existing grounds for a petition and does not involve any emergency procedures for urgent relief. An advertised statutory demand followed by a petition would do as well.


1.34 The proposed ground might or might not be used by a creditor where a debtor has already fled Hong Kong, though at that stage it is probable that a creditor would use one of the other grounds to present a petition. A creditor may consider that it would be useful to bankrupt a debtor who has fled Hong Kong leaving debts as, under our recommendations, where a bankrupt has departed from Hong Kong and he has not complied with a request by the trustee to return to Hong Kong bankruptcy should not begin, or may be suspended, until the bankrupt returns.24 Thus, the bankruptcy order would remain in effect until such time as the bankrupt returned. This, of course, might be of no consequence to some absconding bankrupts but those that returned to Hong Kong, for any reason, could be arrested at the immigration checkpoint if there was a warrant out for their arrest.



Where the debtor has not departed from Hong Kong


1.35 Where the debtor had not yet left Hong Kong and there was evidence that he was fraudulently incurring debts, never intending to pay them, and was about to emigrate, a number of existing procedures may be invoked. However, all these procedures would involve emergency orders being obtained to restrain the debtor from dealing with his assets or leaving the country. Merely issuing a bankruptcy petition on the new ground would not achieve this but, combined with the other remedies, it would serve ultimately to vest a bankrupt’s property in the trustee. This would be an advance on the obtaining of, say, a Mareva injunction, which only has the effect of freezing the assets of a debtor.


1.36 In addition to Mareva injunctions, a creditor may seek interim orders for the delivery up of property and the appointment of interim receivers to take over assets or prohibition orders may in some cases be obtained to stop the defendant leaving the jurisdiction until a judicial hearing can be arranged. These emergency procedures are well known and contain provisions to balance the interests of the plaintiff and the defendant.


Conclusion


1.37 We have considered the arguments for and against the proposed ground with care. We have decided, by a majority, and having regard to the unanimous decision of the sub-committee in favour of the proposal, to recommend that a petition for bankruptcy may be presented in favour of a debt if at the time the petition is presented a debtor intends to depart or has departed out of Hong Kong, knowing that a necessary consequence of his departing would be to defeat or delay his creditors notwithstanding that his absence from Hong Kong had nothing to do with his debts.


1.38 We acknowledge the concern expressed that there is a risk that some debtors might have petitions presented against them by creditors trying to use the provision as a form of blackmail. We do not consider that this is likely to be a significant problem, as the court can be relied on to dismiss unmeritorious petitions when the debtor presents his case.


1.39 We recognise that a person might legitimately have to leave Hong Kong urgently or unexpectedly in circumstances where he is unable to make proper arrangements for his debts but that he may intend to see to these matters on his return. However, a debtor has an obligation to meet his debts as they fall due, failing which he leaves himself open to action by his creditors, who would not be aware of a debtor's good intentions. A prudent debtor should take steps to advise his creditors of his situation, either before departure or from abroad, and so pre-empt bankruptcy proceedings by his creditors, especially in circumstances where there is a chance that action will be taken. The adoption of the new ground for presenting a bankruptcy petition would sound a warning to debtors that they are responsible for repayment of their debts and that they neglect their responsibilities at their peril.


1.40 We accept that the consequences of presenting a bankruptcy petition would be serious for a debtor but it would be within the power of a debtor to have a petition withdrawn or dismissed if he was not insolvent. It is not uncommon for bankruptcy petitions to be withdrawn. We do not believe that the new ground would present any hardship to a reasonable and prudent debtor. It would, however, in our view provide an effect means for creditors to protect their interests from less scrupulous debtors.



Expediting the presentation of the petition


1.41 The Official Receiver proposed, and we recommend, that the procedure for expediting the presentation of a petition under section 270 of the Insolvency Act should be adopted. This provides that the 3 weeks' grace period given to a debtor under section 268(1)(a) of the Insolvency Act can be curtailed if there is a probability that the debtor's assets will be diminished during the grace period. This provision should be helpful to a creditor who fears that a debtor is about to abscond with his assets.


1.42 We appreciate that this recommendation will only be useful in certain circumstances but believe that it, and our recommendation on absconding debtors, would give creditors some assistance.



Individual voluntary arrangements


1.43 We have considered the position of a debtor who defaults under a form of voluntary arrangement. At present the only forms of voluntary arrangements available in Hong Kong are compositions and schemes of arrangement under section 20 of the Bankruptcy Ordinance but in the chapter on voluntary arrangements later in this report we recommend that a default by a debtor in his obligations under a voluntary arrangement should provide a ground on which a petition can be presented.25



Recommendations