FRED LEE, trustee of the property of LIU MAN HOO, a bankrupt v. LIU MAN HOO HCB 11719/2002 (2)

S’s words:
Apart from the interpretation of Section 30A(4)(a),the Judge further commented that the 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 to raise his objection based on Section 30A(4)(d) (the 2nd grounds of objection of the Trustee). With no doubt, the Trustee in this case did not even conduct any interview with the bankrupt for his pre-bankruptcy conducts.

That 2nd grounds of objection goes to the unsatisfactory conducts of a bankrupt. The Judge finally decided that the bankrupt’s pre-bankruptcy conducts were unsatisfactory. However, it is quite difficult to understand why the Judge has to take the role to investigate the same but not for the Trustee to hold investigations to ensure the same beforehand.

Further, even though the bankrupt was ruled with pre-bankruptcy conducts, the Judge refused to exercise its discretion. The Judge ruled that the pre-bankruptcy conducts should be so serious. Bearing in mind that there was no interview with the bankrupt in relation to his pre-bankruptcy conducts, it is expected that it would be too difficult to conclude that “the unsatisfactory pre-bankruptcy conducts were so serious that it would be difficult for a bankrupt to escape suspension altogether”

The issue of interim order will be mentioned in another post.

--- quote from judgment ---

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

(continue)

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).

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Unsatisfactory conducts
In Lee Fred v Leung Chin Yeung [2007] 1 HKC 164, all the counsel agreed that it connotes a broad and low jurisdictional threshold (see Para.44).

In Para.45, Kwan J made the following observation regarding excessive borrowing,

“ In a case involving excessive credit in which loans were obtained when the debtor should have known he would not be able to repay, where the bankrupt has been co-operative with the trustee and made voluntary contributions to the estate, and provided there is no other misconduct, I am inclined to think that the pre-bankruptcy conduct is not such as to warrant suspension of the running of the relevant period.”

I agree with Deputy Judge A To that in that paragraph, Kwan J was dealing with how the discretion should be exercised as opposed to whether excessive borrowing can constitute unsatisfactory conduct under Section 30A(4)(d).

In Fred Lee v Tong Yuk Kin HCB 22870 of 2002, 20 June 2007, Deputy Judge A To made reference to the law under the old Bankruptcy Ordinance and took the view that in general, the matters set out in Section 30(4) under the old ordinance could be regarded as examples of unsatisfactory pre-bankruptcy conducts (para.14). The protection of the integrity of the automatic discharge system and the prevention of abuse of the bankruptcy regime were identified as the rationale for taking pre-bankruptcy conducts into account (paras.15 and 16). The acid test formulated by the learned judge is as follows (para.17),

“ Ultimately, the question of whether the conduct is unsatisfactory is whether the conduct is one which the society is prepared to condone without expressing disapproval. This question is to be answered by the reasonable man’s test. This hypothetical reasonable man has to bear in mind the overriding purpose of rehabilitation. He has to take into account whether the debt is a business debt or consumer credit and consider the reasons for which the debt was incurred, the amount of the debt as compared with the bankrupt’s means and station in life, the blameworthiness of the bankrupt and all the circumstances in which the debt arose. In addition, the reasonable man has to take into account human nature, its weakness, its readiness to indulge in extravagant spending and its readiness to engage in speculation and assumption of risk.”

This test was adopted and applied by Master Kwang in Fred Lee v Kwan Kwong Ning HCB 17846 of 2002, 20 August 2007.

In the present case, the Trustee apparently did not conduct any meaningful investigation as regards how the debts of Liu came to be incurred. According to Mr Chan, the Trustee simply extracted the information from the documents filed for proof of debts and the statement of affairs to come to the view that objection should be made. In Lee Fred v Leung Chin Yeung [2007] 1 HKC 164 Kwan J referred to the practice of this trustee at para.35 and explained at para.38 why this practice is flawed. At para.38, Her Ladyship alluded to the fact that the Trustee has filed 150 objections out of 360 cases in which he was appointed during June 2002 to January 2003. I have not been told whether the present case is one of those 150 objections. But the Trustee was appointed within that period and the present objection was filed in September 2006. On 5 October 2006, the present application was adjourned pending the decision of Kwan J. in the three test cases. It was restored on 6 March 2007 after the judgment of Kwan J.

Having regard to the circumstances as a whole, though I do not think Liu intended to cause financial loss to his creditors, I am of the view that Liu’s pre-bankruptcy conducts were unsatisfactory.

Exercise of discretion
In my judgment, the court must take an overall view of the matter in the exercise of discretion. Whilst there are cases where the unsatisfactory pre-bankruptcy conducts were so serious that it would be difficult for a bankrupt to escape suspension altogether (see Para.17.42 of the Law Reform Commission Report), I am of the view that this case does not fall within such category.

In this connection, I respectfully concur with Lander J’s observations in the Federal Court of Australia in Frost v Sheahan (2005) 3 ABC (NS) 288 at p.294-5,

“ The purpose of the objection procedure is to provide the trustee with a power by which he can induce the bankrupt to act in accordance with the bankrupt’s obligations.
The trustee should not use the power for the purpose of punishing the bankrupt for acts taken by the bankrupt which cannot be rectified. Rather, the power should be used for the purpose of persuading the bankrupt to discharge the bankrupt’s duties under the Act.
It is a power, however, which must be used sparingly and for the purpose of protecting the interests of creditors and in generally advancing the administration of the estate of the bankrupt.
In a sense, it is a power of last resort when no other form of persuasion will assist to remind the bankrupt of the bankrupt’s obligations.”