Case Illustration

Bankruptcy Scenario

Mr. T is a Hong Kong merchant who frequently travels to mainland China. He borrowed $300,000 from ABC Bank, repayable by monthly instalments. He fails to make any repayment to the bank for six months despite verbal and written demands from the bank. The bank wishes to file a bankruptcy petition against Mr. T.

Question 1:
Can ABC Bank file a bankruptcy petition against Mr. T at this stage? Answer 1

Question 2:
What can ABC Bank do if the statutory demand fails to reach Mr. T, or if Mr. T tries to avoid receiving the demand? Answer 2

Question 3:
Apart from validly serving the statutory demand on Mr. T, what other conditions must be satisfied before ABC Bank can file a bankruptcy petition? Answer 3

Question 4:
During the court hearing for the bankruptcy petition, Mr. T said that he had spent a long period in mainland China and had not received the statutory demand. He only received the bankruptcy petition two days before the hearing. Can he ask the Court to suspend or dismiss the bankruptcy proceedings? Answer 4

Question 5:
If a bankruptcy order is granted against Mr. T, then what will happen to Mr. T? Answer 5

Question 6:
What are the effects of bankruptcy on Mr. T's job?Answer 6

Question 7:
If Mr. T absconds to China and takes $10,000 in cash, then what possible legal action will he face? Answer 7

Question 8:
If Mr. T gives his car to his brother as a gift, then what possible legal action will he face? Answer 8

Question 9:
What can ABC Bank do after a bankruptcy order has been granted against Mr. T? Answer 9

Question 10:
When will Mr. T be discharged from his bankruptcy order? Answer 10

Question 11:
Can Mr. T apply for an early discharge of the bankruptcy order even if its effective period has not expired? Answer 11

Answer 1:
Before filing the petition with the High Court, the bank should issue a statutory demand to Mr. T stating the details of loan arrears with the demand, and the time limit for repayment. Standard bank demand notes or reminders cannot be treated as statutory demands. In usual practice, the bank will instruct a lawyer to prepare the statutory demand and the subsequent bankruptcy petition. The bank or its lawyer must use all reasonable ways to bring the statutory demand to Mr. T's attention, such as by sending the demand to Mr. T by hand.

Answer 2:
The bank should first make sure that the demand has been sent to the last known address or usual place of abode or business of Mr. T. Otherwise, Mr. T may challenge the validity of the statutory demand in the subsequent bankruptcy proceedings.

If the bank or its lawyer has repeatedly sent the statutory demand by post or by hand, and they have reasonable grounds to believe that Mr. T has absconded or is trying to avoid receiving the demand, the bank or its lawyer can advertise the demand in one or more local newspapers. The Court may accept this as a reasonable way of serving the statutory demand.

Answer 3:

According to section 6 of the Bankruptcy Ordinance, the conditions are as follows:

1. the amount of debt for the petition should be equal to or exceed $10,000;


2. the debt is for a “liquidated” sum (i.e. a sum with precise calculation) payable to the petitioning creditor either immediately or at some certain time in future, and is unsecured;
   
3. the debtor appears to be unable to pay or has no reasonable prospect of being able to pay the debts; and
   
4. there is no outstanding application to Court to set aside (make it invalid) the statutory demand.

For proving the inability to pay or no reasonable prospect to pay the debt, the creditor should show that the debtor has failed to comply with or set aside the statutory demand within 3 weeks after the demand was served (if served by a newspaper advertisement, then from the date of posting in the newspaper).

If ABC Bank has fulfilled the above conditions, then it or its lawyer can file the bankruptcy petition with the High Court and serve the sealed copy of the petition on Mr. T.

Answer 4:
If the bank or its lawyer has used all reasonable ways to send the demand and the petition to Mr. T, such as advertising them in local newspapers with approval from the Court, Mr. T has little chance of avoiding or suspending the proceedings by challenging the ways in which the documents were delivered by the creditor.

Answer 5:
When a bankruptcy order has been granted against Mr. T, no other legal proceedings can be taken or proceeded with against the him or his assets without the permission of the Court. The bankruptcy order will be advertised by the Official Receiver in the Gazette and two newspapers (one in Chinese and one in English).

Mr. T should attend the Official Receiver's Office for an interview about his current financial status and the future arrangement of his assets. He should also submit a Statement of Affairs (a document that includes the details of his financial status and all of his current liabilities) to the Official Receiver. He may also be required to attend all subsequent meetings with his creditors, the Official Receiver and the Trustee regarding the future arrangement of his assets and repayment procedures.

Mr. T should not make repayments directly to individual creditors, including ABC Bank without the approval of the Court and the Official Receiver. He should stop using credit cards or apply for loans from financial institutions. He should also cease payment of any life insurance premium. He cannot enjoy luxuries such as buying a car or travelling by taxi unless he has reasonable grounds to do so.

The Official Receiver/Trustee will take control of Mr. T's assets and income. The Trustee or the representative of the Official Receiver has the right to inspect Mr. T's house if necessary. His provident fund (if any) will be considered as part of his assets (subject to the provisions of the relevant provident fund scheme).

Mr. T should hand over all of his assets (both local and overseas) to the Official Receiver/Trustee and submit all documents related to his assets such as bank account statements or the account books of his business, etc. He should also inform the Official Receiver/Trustee of all of his income/earnings.

If Mr. T owns a flat under the joint name of his wife, then his share may be realised for the repayment of his debts. If he owns any property outside of Hong Kong, then the Official Receiver/Trustee will require him to sell that property for the benefit of the creditors and to sign all necessary authorities, deeds and documents for such purpose. If Mr. T refuses to do so, then he may be punished for contempt of court.

After the deduction of administrative expenses and reasonable living expenses for Mr. T and his family, the Official Receiver/Trustee will distribute Mr. T's assets (including his current income) to his creditors by way of dividends. However, Mr. T's family members will not be required to bear his indebtedness.

With regard to the matter of reasonable living expenses as mentioned above, the High Court has made the following ruling (as per the case of Re Lau Nga Yee Christine ):

• A person's "reasonable domestic needs" should be the same whatever the size of his debt. The mere fact that a large amount is due cannot somehow make a basic need less reasonable.
• In principle the education of one's children can constitute a "domestic need" of the bankrupt and her family. The expense is "domestic" in the sense that the education of sons and daughters is a conventional incident of maintaining a family and home. It is a "need" in the sense that, especially in Hong Kong, the education (including the tertiary education) of one's offspring is regarded as an important parental and social responsibility, irrespective of any obligations imposed by the letter of the law.
• In view of the bankrupt's genuine need to support her family, together with the special nature of her job, the Court (in the subject case) also allowed reasonable expenses in the following areas:
• expenses of a part-time domestic helper;
• emergency taxi fare (to deal with emergency duty calls from her employer, i.e. Hospital Authority);
• support for the bankrupt's parents (both nearly 80 years old, whilst the bankrupt's 2 siblings were also in financial difficulties);
• job-related expenses.

Answer 6:
Mr. T will not be able to act as company director or to practice certain professions such as lawyer, estate agent or insurance agent, etc. If Mr. T works in a private company, then the Official Receiver/Trustee will not approach his employer unless it is necessary for the collection or investigation of his financial information.

Answer 7:
According to section 135 of the Bankruptcy Ordinance, any persons who are adjudged bankrupt will be guilty of an offence (unless they prove that they had no intent to defraud) if after the presentation of a bankruptcy petition, or within six months before such a presentation, quit Hong Kong and take with them, or attempt or make preparations to quit Hong Kong and take with them, any part of their properties to the amount of $100 or more, which should by law be divided among their creditors. Such persons will be liable to imprisonment for up to two years.

Also with reference to section 136 of the Bankruptcy Ordinance, any persons against whom bankruptcy orders are made will be guilty of an offence if they conceal or absent themselves from their usual or last known place of abode or business or quit Hong Kong, with intent to avoid service of any legal documents in bankruptcy or to avoid examination of their affairs or otherwise to delay any bankruptcy proceedings against them. Such persons will also be liable to imprisonment for up to two years.

In that case, Mr. T has committed bankruptcy offences and may be liable to imprisonment.

Answer 8:
According to section 132 of the Bankruptcy Ordinance, any persons who have been adjudged bankrupt will be guilty of an offence if they have made any gifts or transfers of, or charges on, their properties with the intent to defraud their creditors. Such persons will be liable to imprisonment for up to a maximum of two years.

If Mr. T transfers his car to his brother to defraud his creditors, then he has committed a bankruptcy offence and may be liable to imprisonment.

Answer 9:
ABC Bank must complete a Proof of Debt Form with supporting documents to prove that Mr. T has contracted the $300,000 debt. The Proof of Debt Form should be submitted to the Official Receiver's Office.

The bank may request the Official Receiver to call a general meeting of all of Mr. T's creditors to appoint a Trustee for Mr. T's assets. If the total value of Mr. T's assets is less than $200,000, then the Official Receiver will usually act as the Trustee.

If necessary, the bank can request the Official Receiver to apply to the Court for a public examination of Mr. T in open court. Such an application must receive consent from the creditors with not less than 25% in gross value of the debt.

Answer 10:
The bankruptcy order will be discharged in 4 years after its issuance if :

• Mr. T has not been previously adjudged bankrupt;
• There is no valid objection from ABC Bank and other creditors against the discharge; and
• Mr. T has fully complied with the provisions in the Bankruptcy Ordinance

If Mr. T has been previously adjudged bankrupt, then the order will be discharged in 5 years.

If ABC Bank or other creditors successfully object to the discharge of the bankruptcy order (e.g. due to Mr. T's unsatisfactory conduct, failure to fully disclose his assets/earnings, etc. ), then the order may be extended for a maximum of 4 years (if Mr. T has previously been adjudged bankrupt, the maximum extension is 3 years).

When the bankruptcy order is discharged, Mr. T will be released from all provable debts, including any debts or liabilities that were proved in the bankruptcy proceedings. However, Mr. T remains liable for the following debtsregardless of the discharge of the bankruptcy order: those incurred by fraud, fines imposed for offences, or damages in respect of personal injuries on other persons, etc.

The Court may, as a condition of granting the discharge, order Mr. T to continue to make contributions to repaying his debt in such amount and for such period as it considers appropriate but not exceeding eight years from the date the bankruptcy order.

Answer 11:
If Mr. T has not previously been adjudged bankrupt, then he may at any time apply to the Court for an early discharge. If he has been previously adjudged bankrupt, then he may make the application not less than 3 years after the date of the bankruptcy order.

However, the Court may not make the order for early discharge if, for example, the bankrupt:

1. has previously entered into an individual voluntary arrangement (IVA);
2. has unsecured liabilities that exceed 150% of the income which the trustee determines that was derived by the bankrupt during the year immediately before the date of the bankruptcy order;
3. has failed to disclose a beneficial interest in any property;
4. has failed to disclose any liability that existed at the date of the bankruptcy order;
5. has after the date of the bankruptcy order continued to act as a director or taken part in the management of a company, except with the permission of the court; or
6. has failed to co-operate with the trustee.

In addition, the Court may not grant the order for early discharge if the creditors raise valid objections against the discharge.