LegCo Paper No. CB(1) 1800/95-96
(These minutes have been seen by
the Administration)
Ref : CB1/BC/28/95/2

Bills Committee on Bankruptcy (Amendment) Bill 1996

Minutes of the Meeting
held on Tuesday, 28 May 1996 at 8:30 am
in Conference Room A of the Legislative Council Building

Members Present :

    Hon Ronald ARCULLI, OBE, JP (Chairman)
    Hon LAU Hon-chuen, JP
    Hon Bruce LIU Sing-lee
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai
    Mrs Hon Elizabeth WONG, CHIEN, Chi-lien, CBE, ISO, JP

Members Absent :

    Hon Eric LI Ka-cheung, JP
    Hon Andrew CHENG Kar-foo
    Hon LEE Kai-ming

Member Attending :

    Hon Margaret NG

Public Officers Attending :

Mr Peter Tisman
Principal Assistant Secretary for Financial Services
Mr Robin Hearder, JP
Official Receiver
Mr Michael E Brown
Assistant Official Receiver
Mr W Berkeley Maddaford
Deputy Principal Crown Counsel
Mr Jeremy A Glen
Senior Crown Counsel
The Law Reform Commission of Hong Kong

Staff Attending :

Ms Estella CHAN
Chief Assistant Secretary (1)4
Mr Arthur CHEUNG
Assistant Legal Adviser 5
Miss Anita SIT
Senior Assistant Secretary (1)6

Election of Chairman

Mr Ronald ARCULLI was elected Chairman.

Meeting with the Administration

Simplified bankruptcy procedures

2. Members were concerned that the "simplified" bankruptcy procedures, with acts of bankruptcy and bankruptcy notices replaced by a statutory demand, might open the opportunities for improper bankruptcy petitions which might unreasonably jeopardize the position of the debtors concerned. For example, a statutory demand might not have been properly brought to the attention of the debtor concerned, or in the case of businesses, the attention of the senior management. Under the new procedure, the absence of response would be regarded as a failure to comply with the statutory demand and thus a bankruptcy petition would be presented against the debtor after 21 days. Mr Robin Hearder and Mr Michael E Brown explained that in petitioning for a bankruptcy order, a creditor or creditors would have to prove that the statutory demand had been properly served on the debtor. In any case, a debtor would have the remedy of getting the proceedings set aside for lack of notice.

3. On whether the new procedures would give rise to opportunities for abuse by persons using the self-petition bankruptcy procedures to evade debts, Mr Brown advised that there would be sufficient safeguards against this kind of abuse as the trustee of the bankrupt's estate, by acting with due diligence, should be able to know whether the bankrupt was concealing any assets. He also confirmed that no changes to the existing investigatory procedures on a bankrupt's estate were introduced in the Bill.

Impact of the changes to the discharge procedures on the effectiveness of bankruptcy as a sanction

4. Members were concerned that the proposed discharge provisions, where a bankrupt would be automatically discharged from bankruptcy, subject to there being no objections from the trustee of the bankrupt's estate or a creditor, three years after the date of the bankruptcy order in the case of a first bankruptcy, and five years in the case of any subsequent bankruptcy, might be too lenient. A member was concerned about whether the new discharge procedures would reduce the gravity of the legal sanction to an extent that it no longer had an effective deterrent effect on debtors, and creditors no longer could rely on it for collection of debts owed to them.

5. Mr Peter Tisman advised that the Law Reform Commission (LRC) was alive to the need to strike a balance between the interests of creditors and those of debtors. On the one hand, the proposed bankruptcy procedures would make it easier for creditors to initiate bankruptcy proceedings against debtors. On the other, the proposed discharge procedures would somehow provide greater opportunities for bankrupts to be discharged from bankruptcy and start afresh. He remarked that the proposed Section 30A would enable the trustee or a creditor of a bankrupt to raise objections to the automatic discharge on fairly general grounds. A bankrupt would probably not be discharged, subject to a maximum bankruptcy term of eight years for both first bankruptcy and subsequent bankruptcies, if he failed to carry out his obligations to his trustee or creditors. There were also provisions which enabled the court to instruct a discharged bankrupt to continue paying off his/her creditors.

6. A member noted that with the relaxed discharge provisions, people might be more inclined to finance a big gamble by huge borrowing. While the worst consequence for these people was to become bankrupt with the prospect that they could be discharged after a few years, the creditors had to bear the financial loss.

7. Mr Hearder shared members' view that bankruptcy was an ultimate part of the debt-recovery enforcement procedure on which modern businesses relied. The business community required a reasonable judicial system to enforce debt recovery and a reasonable system to resolve disputes over debts. He said that the Administration was ready to consider any counter proposal from members regarding the discharge provisions.

8. On members' concern about whether people could evade maintenance payments by self-petitioning for bankruptcy, Mr Brown advised that maintenance payments were not a provable type of debt in bankruptcy. Debt of this nature would survive a person during the bankruptcy term and after discharge. Mr Hearder further advised that a bankrupt who was required to make maintenance payments would have that amount deducted before he was subject to an income payment order which provided that the bankrupt had to put aside a certain amount of income towards his creditors.

9. As regards the possible impact of the new discharge provisions on the number of bankruptcy cases in Hong Kong, the Administration responded that there was no reliable basis on which the impact could be ascertained. Even by reference to UK or other similar jurisdictions, the effect of the new discharge provisions could hardly be isolated from other factors. It however agreed to give an estimate for the Committee's reference.

(Post-meeting note: The information has been circulated to members vide LegCo Paper No. CB(1) 1566/95-96 dated 7 June 1996.)

Overseas experience

10. In response to members' enquiry about the experience of U.K. since the enactment of the Insolvency Act 1986, Mr Hearder said that in general, the new procedures were welcome by both creditors and debtors, as they were simpler and less costly for both sides. The individual voluntary arrangements were increasingly utilised by the community. Mr Glen added that while there had been a fairly substantial increase in the number of bankruptcy cases in UK in the late 1980s, he believed that the increase was more attributable to the economic circumstances at that time than to the new procedures.

11. Mr Hearder advised that Hong Kong had about 450 bankruptcy cases a year, Singapore had about 1,200 cases, and UK had about 12,000 cases. He also advised that non-trading bankruptcy cases were on the increase in Hong Kong as in other financially developed countries. Last year, they accounted for about 45% of the total number of bankruptcy cases. In reply to the Chairman, Mr Hearder confirmed that bankruptcy cases resulting from over-spending by means of credit facilities were regarded as non-trading cases. Members requested and the Administration agreed that the breakdown between trading and non-trading cases in other jurisdictions adopting similar bankruptcy legislation, including UK and Singapore, be provided to the Bills Committee.

(Post-meeting note: The information has been circulated to members vide LegCo Paper No. CB(1) 1566/95-96 dated 7 June 1996.)

Tax secrecy

12. On the implications of the new bankruptcy procedures on tax secrecy, Mr Hearder advised that under the proposed provisions, the Official Receiver (OR) or the trustee could only obtain the tax returns of the bankrupt. They would not be allowed to obtain the correspondence between the tax assessor and the bankrupt or his/her representative. The OR or the trustee should first try to obtain the bankrupt's expressed consent to releasing his tax returns. If the bankrupt was not available or refused to give consent, the OR or the trustee could apply to the court to obtain the tax returns.

13. On whether the OR or the trustee would have access to a company's financial documents if the bankrupt concerned was the company's major shareholder, Mr Hearder advised that the OR or the trustee would have access to the documents only if such was necessary for the realisation of the bankrupt's assets.

Time and manpower implications

14. On how the simplified bankruptcy procedures would reduce staff time and costs of the OR's Office, Mr Hearder advised that at present, after issuing a receiving order, it took about three months for the OR to investigate the assets of a bankrupt and to proceed with the summary or non-summary procedures leading to the issue of an adjudication order. The three-month time lag would no longer exist if the present two-stage procedure was replaced by the proposed bankruptcy order procedure.

15. On the manpower implication of the proposed new procedures on the Official Receiver's Office, Mr Hearder said that it was anticipated that the new individual voluntary arrangements and discharge procedures might create some additional work. However, this would be balanced off to a certain extent by the savings due to the simplified bankruptcy procedures. He undertook to provide an estimate on the manpower savings for the Committee's reference.

(Post-meeting note: The information has been circulated to members vide LegCo Paper No. CB(1) 1566/95-96 dated 7 June 1996.)

Jurisdiction of the Ordinance

16. In reply to a member, Mr Hearder advised that the jurisdiction of the Bankruptcy Ordinance was confined to Hong Kong and there would be no change to this after the return of sovereignty to China in 1997, unless and until the Government of the Special Administrative Region entered into any agreements with other countries. He further advised that the LRC was aware that there were provisions in the bankruptcy codes of Australia, Canada, UK and USA on cross-border insolvency recognition. Having considered that cross-border jurisdiction on insolvency was also concerned with the subject of liquidation of companies, the LRC decided to examine the subject in its third report which would deal with companies winding-up legislation.

17. Members expressed concern that in the absence of provisions on cross-border jurisdiction, there might be problems with the enforcement of the Ordinance. They enquired if there was any mechanism to prevent a bankrupt from absconding. Mr Glen acknowledged that little could be done in the bankruptcy legislation to prevent a bankrupt from absconding. Mr Hearder advised that the authority could apply to the court for a warrant of arrest to prevent a person against whom a bankruptcy order had been petitioned from leaving Hong Kong. Such persons leaving Hong Kong via the airport and other border points would be identified by the Immigration if they used the Hong Kong Identity Card.

Calculation of interests on debts

18. On the changes introduced with regard to provable interests on debts, Mr Brown explained that under the existing provisions, approved debts were entitled to claim interests up to the date of the receiving order, but any contractual interests in excess of 8% per annum would have to be re-calculated at 8%. The recalculation was sometimes very time-consuming and cumbersome. The proposed new provisions provided that interests on approved debts up to the date of the bankruptcy order were provable at the contractual rate, even if that was in excess of the statutory rate, i.e. 8%, subject to the contractual rate not being extortionate. In reply to the Chairman, Mr Glen said that under the Money Lenders Ordinance, a simple rate of 48% or above was considered extortionate.

Relation Back

19. On the reasons for not incorporating the LRC's recommendation of retaining the concept of "relation back" into the Bill, Mr Brown explained that at present, the relation back period was tied with the date of the first act of bankruptcy. With the abolition of the acts of bankruptcy procedures, formulation of the relation back period became a problem. The LRC recommended to tie the relation back period to the three-month period immediately before the presentation of the bankruptcy order. This was however not workable in practice because the court could not infer that during the proposed relation back period, a bankrupt and/or other concerned parties had knowledge of a prospective bankruptcy petition, and thus the court could not decide if a transaction or act during this relation back period was a culpable act of the bankrupt.

20. Mr Glen said that the Sub-committee on Insolvency was aware of the concern and wanted to abolish "relation back". However, the LRC did not support this in the absence at this stage of effective anti-avoidance provisions. Mr Hearder added that the experience in UK and Singapore revealed that the effective safeguards were provisions to empower the court to set aside doubtful transactions. The Administration therefore recommended that the relation back provisions be abolished in view of the uncertainty entailed and new anti-avoidance provisions be introduced to enable transactions "at an undervalue" and "unfair preferences" which occurred between six months and five years before the presentation of a bankruptcy petition, to be set aside by the court.

21. In reply to members, Mr Brown advised that the same time period to which the new anti-avoidance provisions applied was first adopted in UK, and later in Singapore and Australia.

Anti-avoidance provisions

22. In reply to the Chairman, Mr Brown confirmed that the proposed provisions did not exempt transactions or gifts under a certain value from the anti-avoidance provisions. The Chairman was concerned that this might cause unnecessary embarrassment to those persons in receipt of gifts from a bankrupt without any knowledge of his/her financial circumstances. Mr Hearder advised that at present, it was an administrative understanding that gifts that could be liquidated easily and were not directly concerned with a person's livelihood would be regarded as doubtful.

23. Members were concerned if the proposed provisions would be adequate to distinguish between transactions calculated to avoid obligations to creditors and transactions entered into by a debtor with a genuine intention to pay off his/her creditors. They were also concerned about whether the innocent counterparties to doubtful transactions would be protected. The Chairman noted that the debtor should be able to avoid being charged by making an agreed arrangement with all his/her creditors for liquidating his/her assets to pay off debts. Mr Hearder advised that the particular circumstances surrounding the transaction concerned would have to be looked at in deciding if any party concerned was at fault. The court would probably regard a transaction valid if the transaction price was a normal forced sale price. In any case, the court would consider a number of factors such as whether the counterparty was in any way associated with the bankrupt.

Priority of payout for different categories of creditors

24. As regards the arrangements for the payment of outstanding wages to employees of bankrupt businesses and the priority order of payouts to different categories of creditors, Mr Hearder advised that the Bill did not introduce any change to the existing arrangements. Employees had the highest priority of payouts, followed by the Government and then other ordinary creditors.

25. In response to the Chairman, Mr Hearder confirmed that the dividend payout procedures would be more flexible under the proposed new provisions. If a dividend was declared, the OR or the trustee should arrange the payout of dividend within a reasonable period of time which was commonly understood to be within three to four years after declaring a dividend. If the case was complicated, the OR or the trustee had the discretion to make an interim dividend payment with a reserve fund set aside for those debts yet to be proved.

Minimum aggregate debt required for bankruptcy petitions

26. On the reason for revising the minimum aggregate debt required for a petition to be presented by a creditor or creditors from $5,000 to $10,000, Mr Hearder advised that the LRC considered that a revision was necessary but was cautious not to set the level so high that the position of employees might be jeopardized. About 40% of past bankruptcy petitions were made by the Director of Legal Aid on behalf of employees of bankrupt businesses. In some cases, the outstanding wages for individual workers only amounted to a few thousands. As regards whether applying different minimum aggregate debt amounts to employees and ordinary creditors was feasible and desirable, Mr Glen said that the Administration was not aware of such a system in other jurisdictions. Members appreciated the practical difficulties in framing such a system in the legislation.

Date of Next Meeting

27. Members agreed that the next meeting would be held on 10 June 1996 at 8:30 am.

28. There being no other business, the meeting ended at 10:30 am.

LegCo Secretariat
9 July 1996

Last Updated on 10 December 1998