Hong Kong's top court finds delay in commencement of bankruptcy period unconstitutional

In the recent case of Official Receiver v Zhi Charles (FACV 8/2015) (5 November 2015), the Court of Final Appeal (the "CFA") found s 30A(10)(a) of the Bankruptcy Ordinance (Cap 6) (the "BO") unconstitutional. Where a bankrupt is not in Hong Kong when he is adjudged bankrupt, this section operates to delay the commencement of the bankruptcy until the bankrupt returns to Hong Kong and notifies the trustee of his return.

Background

On 20 December 2006, a bankruptcy order was made against Mr Zhi, who was not in Hong Kong at the time. He had left Hong Kong in 2003 and lived in the United States until April 2006, and thereafter in South Korea until April 2008. Between 2006 and May 2012, Mr Zhi visited Hong Kong on numerous occasions. However, on no occasion did he notify the trustees of his return.

On 10 May 2012, Mr Zhi was arrested when he entered Hong Kong. Mr Zhi claimed that he was not aware of the bankruptcy order until his arrest.

Mr Zhi further claimed that he had been discharged from bankruptcy since 21 December 2010, by reason of the automatic discharge provision in s 30A(1) and (2) of the BO (see below), and that s 30A(10)(a) was unconstitutional. His claim was dismissed at first instance. He appealed to the Court of Appeal, which found in his favour. The Official Receiver appealed to the CFA.

The law

Section 30A(1) and (2)(a) of the BO provides that a first-time bankrupt is automatically discharged from bankruptcy after the expiration of 4 years beginning with the commencement of bankruptcy (the "bankruptcy period").

However, section 30A(10)(a), provides that where the bankrupt has left Hong Kong before the commencement of bankruptcy, the bankruptcy period does not begin to run until he has returned to Hong Kong and notified his trustee in bankruptcy of his return.

Mr Zhi relied on Articles 31 of the Basic Law and Article 8(2) of the Hong Kong Bill of Rights, of which he alleged that s 30A(10)(a) was in breach. Article 31 provides that Hong Kong residents "shall have freedom to travel and to enter or leave [Hong Kong]". Article 8(2) of the Hong Kong Bill of Rights provides that "everyone shall be free to leave Hong Kong".

It was common ground between the parties that s 30A(10)(a) restricts a Hong Kong resident's right to travel. A disproportionate restriction of a Basic Law right is unconstitutional. The test for proportionality is well-established: a restriction is proportional if it (i) pursues a legitimate societal aim; (ii) is rationally connected with that aim; and (iii) is no more than necessary to accomplish that aim.

It was again common ground that s 30A(10)(a) pursues a legitimate aim, namely to keep the bankrupt on the trustee’s radar in order to facilitate the effective administration of his estate. It was also common ground that s 30A(10)(a) is rationally connected to that aim. Therefore, the sole question before the CFA was whether it is no more than necessary to protect the rights of creditors.

The CFA's judgment

The CFA found that the restriction in s 30A(10)(b)(i) is more than necessary to protect the rights of creditors, and hence disproportionate, for three main reasons:

1. It operates automatically and without exception, regardless of the reason precluding the bankrupt from travelling back to Hong Kong, which could be wholly innocent;
2. The sanction it imposes applied regardless of whether the bankrupt was ready and willing to afford all cooperation to the trustee in the administration of his estate; and
3. The court has no discretion to disapply the sanction it imposes.

In reaching its decision, the CFA was influenced by its earlier judgment in Chan Wing Hing, in which it found s 30A(10)(b)(i) of the BO unconstitutional. Section 30A(10)(b)(i) is similar to s 30A(10)(a), but provides for suspension of the bankruptcy period after its commencement, if the bankrupt leaves Hong Kong without notifying the trustee of bankruptcy of his itinerary and where he can be contacted.

The CFA found no material distinction between the two sub-sections. In fact, it found the obligation imposed by s 30A(10)(a) more onerous, in that it required the bankrupt physically to return to Hong Kong and notify the trustee.

Bankruptcy (Amendment) Bill 2015

The Legislative Council is now considering the Bankruptcy (Amendment) Bill 2015. It proposes to repeal the entire s 30A(10) regime and replace it with a regime whereby the trustee may apply to the Court for a non-commencement order should the bankrupt fail to attend the initial interview or to provide the trustee with information requested.

The Bankruptcy (Amendment) Bill 2015 is expected to come into effect on 1 November 2016, but will not have retrospective effect on any bankruptcy order made before that date.

Practical implications

The biggest practice implication is that until the commencement of the new regime, a debtor who is declared bankrupt while out of Hong Kong can effectively "wait out" the bankruptcy by staying away until the end of the bankruptcy period, thereby frustrating the administration of the bankrupt estate and creditors.

Creditors and trustees will need to be far more diligent to do whatever they can to monitor whether the bankrupt re-enters Hong Kong at any time during that period.

If you wish to discuss this case or any other matter, please contact Gareth Thomas, Damien Whitehead or your usual Herbert Smith Freehills contact.