FRED LEE, trustee of the property of LIU MAN HOO, a bankrupt v. LIU MAN HOO HCB 11719/2002 (1)

S’s words:-
I believe I have in some places made a comment as to whether a trustee should lodge his/her objections for an automatic discharge. The following is another case authority that the Judge did have commented seriously whether the trustee should make an objection.
However, there are some other issues being discussed in this case. Thus, I would try my best to use separate posts to discuss the same.

There was no dispute that the post-bankruptcy conducts of the bankrupt were satisfactory. Further, in fact, he repaid a lot during the four years.

In my personal view, the first grounds of objection by the Trustee was terrible:-

“That Liu is likely within 5 years of commencement of the bankruptcy to be able to make a significant contribution to his estate [Section 30A(4)(a)].”

If whenever a trustee could make good contribution to his estate in the 5th year (and in the 1st to 4th years as well), the Trustee could simply rely on such a ground to submit an objection with the intent to say that the bankrupt could repay more in the 5th year, it would be too discouraging for the bankrupt to try his best to make any repayment.

Fortunately, the Judge did have analysed so well to determine the true intention of the legislation, i.e., when one is repaying for the past 4 years, his discharge should not be suspended due to the fact that it is expected he can in the 5 year be able to make further signification contribution to his estate.

The Judge also commented if a trustee has adopted a practice of raising an objection under Section 30A(4)(a), such practice should be rectified.

--- quote from judgment ---

Before : Hon Lam J in Court
Date of Handing Down Reasons for Decision : 14 September 2007

A bankruptcy order was made against Mr Liu Man Hoo [“Liu”] on 10 October 2002. Since then, he had made reasonable efforts in making regular contributions to his estate for the purpose of repaying his creditors. The total amount of provable debts is $3,654,698. In the four years since the making of the bankruptcy order, Liu had contributed $1,442,011.05 to his estate. Several dividends were declared in favour of the creditors. Liu had been co-operative with the Trustee since his bankruptcy and full and frank disclosure has been given in respect of his affairs. The Trustee accepted that his post-bankruptcy conducts were satisfactory.

In the present case, the Trustee took out an application under Section 30A(3) on 11 September 2006. The grounds of objection relied on by the trustee were,

(a) That Liu is likely within 5 years of commencement of the bankruptcy to be able to make a significant contribution to his estate [Section 30A(4)(a)];
(b) That the conduct of Liu, in respect of the period before the commencement of the bankruptcy, has been unsatisfactory [Section 30A(4)(d)].

The grounds of objection have to be established to give the court a jurisdiction to order suspension. But after a ground is established, the court still has to exercise its discretion in accordance with the facts and circumstances of the case. This is clearly spelt out in Re Hui Hing Kwok [1999] 3 HKC 683; see also Fred Lee v Tong Yuk Kin HCB 22870 of 2002, 20 June 2007 Para.18.

The discretion should be exercised in line with the underlying spirit of our bankruptcy law. In Re Hui Hing Kwok [1999] 3 HKC 683, Le Pichon J (as she then was) referred to the purpose of the automatic discharge provision alluded to in para.17.16 of the Law Reform Commission’s Report on Bankruptcy and succinctly summed up the proper approach as follows,

“ Rehabilitation in the sense of enabling the bankrupt to resume a normal life in society is a key, if not the key, consideration. It should only be delayed by a bankrupt’s own failings.”

In Lee Fred v Leung Chin Yeung [2007] 1 HKC 164, Kwan J reiterated that an application to object to discharge is a serious matter and it should not be embarked upon lightly. At para.37, Her Ladyship cited a very helpful dicta of Smithers J in the Federal Court of Australia in Re Zion and it is worth highlighting the following,

“ In my view it is the policy of the law that bankruptcy should in most cases come to an end at three years … Public interest will require that a discharge be delayed or made conditional if the conduct revealed or the character of the bankrupt indicates that the return of the bankrupt to the commercial world in full freedom might involve the unacceptable risk to persons likely to be engaged in commercial relations with him in the future.”

Hence Kwan J also held that a trustee should exercise his judgment before deciding whether to object. At para.38(1), Kwan J pointed out that it is not appropriate to object merely because there is a ground which comes within one of the provisions in Section 30A(4). I respectfully agree. Insofar as a trustee has adopted a practice of raising an objection as of course when a ground can be framed under that subsection, such practice should be rectified.

I regret that based on what I was told at the hearing, the Trustee seems to have taken the stance that he was only concerned with presenting a case that falls within Section 30A(4) and it is left to the court to decide whether the discretion should be exercised against the bankrupt. That is clearly not the right approach. I hope it is an oversight on the part of the Trustee since he should have been fully aware of Kwan J’s observations. It is important for a trustee to appreciate that he is performing a public duty (Kwan J described it as ‘quasi-judicial’ obligation) and an application for suspension under Section 30A(3) will necessarily entail costs to be incurred. Apart from the grounds under Section 30A(4), a trustee should consider all other relevant circumstances in the case to see whether there is at least an arguable case that the court should exercise its discretion against the bankrupt.

Further, a trustee should carry out the necessary investigation to inform himself of all relevant facts before he could make a responsible and proper decision on whether it is appropriate to object in the circumstances of the case in question. I find it astonishing that in the present case, the Trustee had not even conducted any interview with Liu regarding his pre-bankruptcy conducts before he decided to raise an objection based on Section 30A(4)(d).

In Fred Lee v Tong Yuk Kin HCB 22870 of 2002, 20 June 2007, Deputy Judge A To expressed his agreement with the approach of Kwan J. His Lordship however added that the need to preserve commercial morality is also another important consideration underlying the bankruptcy regime. At para.20, the following observation was made,

“ I think conduct involving fraud or misrepresentation in applying for credit which contributed to bankruptcy would invariably result in an abuse of the bankruptcy regime. Save in exceptional cases, the court’s discretion should be exercised against bankrupts whose bankruptcy was related or contributed to by such conduct.”

As compared with Para.20, I think the approach set out in Para.21 of the judgment of Deputy Judge To is a more balanced one. His Lordship said,

“ It should take into consideration all the circumstances leading to the bankruptcy and not just the conduct complained of. It should consider the seriousness of the conduct, the bankrupt’s conduct after the commencement of bankruptcy, the degree of co-operation he has shown with the trustee during the relevant period and the effort he has contributed to repaying his debt. In an appropriate case, the court should consider the risk to the commercial community should the bankrupt be allowed to resume full commercial activity. The discretion to suspend the running of the relevant period should not be lightly exercised. But in its balancing exercise, the court should not allow the bankruptcy regime to be abused.”

At para.22 of his judgment, Deputy Judge A To made the important point that the purpose of suspension is rehabilitative and it should not to be used as a means of extracting more contribution from the bankrupt for distribution to his creditors. That must be correct insofar as pre-bankruptcy misconducts are concerned. However, regarding cases falling under Section 30A(4)(b),(c),(d) (in respect of post-bankruptcy misconducts), (e) and (h), the purpose of suspension may well be the facilitation of the proper administration of the estate.

Ability to make a significant contribution
Section 30A(4)(a) provides the following as a ground on which an objection can be made,

“ …that the bankrupt is likely within 5 years of the commencement of the bankruptcy to be able to made a significant contribution to his estate”.

In Re Maher (1985) 61 ALR 592, Woodward J had this to say regarding a trustee’s role in the materials placed before the court,

“ Clearly the trustee should not put forward irrelevant information, or intrude on the court’s functions, nor should he take a partisan approach to the application by only putting forward material unfavourable to the applicant and supporting the trustee’s opposition. However, the trustee is under a duty to ensure that the court has before it all material that will assist it in considering an application for discharge …”

Whilst it is right and proper that a trustee should use reasonable skill and care in procuring a proper contribution from a bankrupt to the estate during the usual four years period, I do not think it is the purpose of the objection mechanism under Section 30A to empower a trustee to extract more contributions by asking the court to suspend the automatic discharge on account of a likelihood of significant contribution in the succeeding years notwithstanding that contribution have already been made by a bankrupt to the best of his ability during the first four years. That would be incongruous with the professed objective of rehabilitation.

I believe Section 30A(4)(a) is there to catch those bankrupts who have the ability to make a significant contribution but who choose not to utilize such ability and fail to make a proper contribution during the usual four years period. Such bankrupts are at fault and those cases would warrant a consideration of suspension of the automatic discharge. This was what happened in McGoldrick v Official Trustee in Bankruptcy (1993) 119 ALR 253 where the Australian equivalent of our Section 30A(4)(a) was applied.

The key to the correct construction of Section 30A(4)(a) lies in its reference to the likelihood of the ability of the bankrupt to make a significant contribution within 5 years. If the purpose of the sub-section were to extend the bankruptcy period to facilitate a maximum recovery for the creditors by extracting more contributions in the fifth to eighth years, it needs not refer to the first four years. It would be enough for the legislation to provide under this ground,

“ That the bankrupt is likely to be able to make a significant contribution to his estate in the 4 years after the expiration of the relevant period provided for under sub-section (2) or any part thereof.”

I am of the view that it is a clear case calling for a purposive interpretation of Section 30A(4)(a). There are cogent reasons leading me to the conclusion that the list of objections under Section 30A(4) refers to cases where the bankrupt has been at fault. I do not believe Section 30A (4)(a) is there to enable a trustee to extract further contribution from a bankrupt for the benefit of the creditors when he has not been at fault during the usual 4 years period.

In the alternative, if I were somehow wrong on my construction of Section 30A(4)(a), I will hold that the court should place great weight on the due diligence on the part of a bankrupt in making contribution during the first 4 years in the exercise its discretion under Section 30A(3). If the only ground relied upon to object is that such a bankrupt could make further significant contribution in the years to come, in line with the guidance as regards the underlying policy of Section 30A(3), it is unlikely that the court would order any suspension at all.