The Hong Kong Court of First Instance considers the effect of an annulment of a bankruptcy order on debts that remain unproven when an annulment order is made

The case of Lau Siu Hung and Another v Krzysztof Marszalek and Another [2013] HKEC 936 appears to be the first authority in Hong Kong on the effect an annulment of a bankruptcy order has on debts which remain unproven when an annulment order is made.  On 17 June 2013, the Court of First Instance held that an annulment of bankruptcy cannot prohibit a creditor, who has not proved his debts before, to obtain relief from the court after the annulment.

Background

Bankruptcy orders were made against two ex-directors on the same day Starline International Group Ltd ('Starline') was wound up. Two years later, the ex-directors applied to annul their bankruptcy orders on the basis that their creditors would be paid in full.  A notice of intended dividends was gazetted and advertised, which invited any creditors who had not proved their debts to lodge their proofs.  The liquidators of Starline did not lodge any proof of debt and did not appear at the annulment hearing. 

However, soon after the annulment orders were granted, the liquidators filed proof of debts which were rejected by the Official Receiver.  The liquidators appealed and, separately, made an application to the court to declare various payments allegedly due and owing to Starline by the ex-directors as unfair preferences.  The liquidators eventually withdrew their appeal in respect of the bankruptcies but proceeded on their unfair preference application.  The issue in question arose out of this unfair preference application. 

Amongst other points, Counsel for the ex-directors argued that the liquidators were barred from making the unfair preference application because the ex-directors' bankruptcies had been annulled. 

The Court of First Instance's ruling

The Court of First Instance (following English authorities on point) found that an annulment of bankruptcy does not make a debtor immune to creditors who have not filed proof of debts prior to the annulment. Those debts remain outstanding and are capable of founding a bankruptcy petition.

 The Court of First Instance explained that a bankrupt is entitled to be discharged from liabilities over unpaid debts only after the bankruptcy has taken its course pursuant to the statutory regime (which provides for an automatic discharge after four years for a first time bankrupt and five years for a previous bankrupt, unless there are objections to the discharge).  During that time, the financial affairs of the bankrupt are open to vigorous examination by the trustee to ensure that the creditors would not be cheated. 

An annulment, on the other hand, puts the bankrupt in the same position as if there had been no bankruptcy order made against him.  He is not entitled to a release from his undischarged liabilities, as if the bankruptcy had run its course. 

 Take away points

• There is hope for creditors who have not filed their proof of debts in time and later discover that a bankruptcy order against the individual has been annulled.  Creditors who find themselves in this position can file a fresh bankruptcy petition against the debtor based on such proof of debts.
• However, the position is different if a creditor files a proof of debt which is rejected before an annulment is granted. Such a creditor would be barred from recovering that debt after the annulment.

Please contact Gareth Thomas , Damien Whitehead or Priya Aswani  from our Hong Kong office if you wish to discuss.