Court of Appeal Upholds Suspension of Bankruptcy Periods on Basis of Unsatisfactory Conduct of Bankrupts

Richard Hudson, Partner, Cathy Wu, Associate, Deacons

Section 30A(4) of the Bankruptcy Ordinance (the “BO”), provides eight grounds upon which the Court can order suspension of a bankruptcy period, lengthening the period for up to four additional years. Common grounds on which objections are made to discharge include the bankrupt failing to co-operate in the administration of the estate, unsatisfactory conduct of the bankrupt, or where discharge from bankruptcy would be prejudicial to the estate’s administration.

In Re Lee Raymond Cho Min; Re Lee Priscilla Hwang [2014] HKCU 1114, 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.

Near the end of the Lees’ four year bankruptcy periods, their Trustees applied under s. 30A(3) of the BO for an order suspending their discharge from bankruptcy on the basis that their conduct, both before and after bankruptcy, had been unsatisfactory, and they had failed to co-operate with the Trustees in the administration of their estates.

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

  • it should first be determined whether one or more of the grounds mentioned in s. 30A(4) of the BO has been established; and
  • 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, namely (a) rehabilitation of the bankrupt and (b) public interest in ensuring that the bankrupt’s return to the commercial world would not carry an unacceptable risk to persons who may be engaged in commercial relations with him.

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

The Court of Appeal applied the above test to a “loan” of HK$5 million from the Lees’ joint bank account to a company they controlled. The company then used a portion of the money to pay the Lees’ personal expenses of at least HK$1.6 million, making most payments after presentation of the bankruptcy petition. The Court held that, in the absence of any explanation, this scheme, which “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” fell within the definition of “unsatisfactory” pre-bankruptcy conduct under s. 30A(4)(d) of the BO.

The Lees also had shares in US property holding companies and US bank accounts. The Trustees issued a Chapter15 application and a turnover motion in the US Court to preserve the Lees’ US assets and to ensure the Lees’ US equity interests vested in the Trustees. The Lees resisted the Trustees’ moves in the US by adopting the same stance as the US companies and filing oppositions to these applications.

The Court of Appeal recognised the Trustees’ right under s. 55 of the BO to collect in a bankrupt’s foreign property, and noted that pursuant to s. 26(3) of the BO, bankrupts have a statutory duty to assist trustees to the utmost of their power in the realisation of property. This is a positive duty, meaning that a bankrupt should not resist trustees in their efforts to collect in their assets nor remain inactive when called upon to act. The Lees’ actions in the US proceedings were relevant to the suspension applications. It was clear that they did not assist the Trustees, nor even stay neutral, but instead sought to challenge the Trustees’ actions. This failure to co-operate was unsatisfactory conduct.

The Court of Appeal also found two other aspects of the Lees’ conduct – Mr.Lee’s change of position in relation to a debt owed to him and failure to provide documents to the Trustees relating to the Lees’ income – were unsatisfactory and amounted to a failure to co-operate, and upheld the suspensions of bankruptcy periods of 15 months (Mrs. Lee) and 18 months (Mr. Lee) imposed at First Instance.

This decision clearly states the test that the Court should adopt when deciding whether to order a suspension from discharge of bankruptcy under s. 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 co-operation 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 for suspension 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 owed under foreign law.