Hong Kong: Provable Debt Not Proved before Annulment Of Bankruptcy

Keywords: provable debt, bankruptcy, annulment

In the recent case of Lau Siu Hung v. Krzystof Marszalek (HCCW 484/2009, 17 June 2013) the Court of First Instance held that an annulment of bankruptcy does not debar a creditor, who has not proved his provable debt, from asserting his claim after the annulment.

Procedural Background

Standard Chartered Bank (HK) Ltd (the "Creditor") had presented a creditor's petition to wind up Starline International Group Ltd (the "Company"). The Creditor had also instigated bankruptcy proceedings against two directors of the Company (the "Debtors"), since they were personal guarantors in respect of the Company's debts. The Company was ordered to be wound up on 14 October 2009 and the Debtors were adjudicated bankrupt on the same date.

On 11 November 2011 the Debtors applied for annulment of their bankruptcy orders. Although the Debtors had advertised and gazetted a notice inviting creditors to lodge proofs of debt, the Company's Liquidators (the "Liquidators") did not lodge a proof of debt and did not appear at the hearing of the annulment application. On 22 May 2012 the court granted orders for annulment of the Debtors' bankruptcies (the "Annulment Orders").

After the Annulment Orders had been granted, the Liquidators finally filed proofs of debt in the bankruptcies of the Debtors. However, as the Debtors' bankruptcies had been annulled, the Official Receiver rejected the Company's proofs of debt.

The Liquidators' Application

In the present proceedings, the Liquidators applied to invalidate 19 payments that the Company had made to the Debtors on the basis that they were unfair preferences under sections 266 and 266B(1)(b) (ii) of the Companies Ordinance (the "Unfair Preference Application"). The 19 payments were included in the Company's proofs of debt.

Estoppel by Record

The Debtors submitted that the Liquidators were "estopped by record" from making the Unfair Preference Application because of the Annulment Orders. Estoppel by record occurs where an issue of fact affecting the status of a person has been determined in a final manner as a substantive part of a judgment, and the same issue comes directly in question in subsequent proceedings between the parties.

The factual basis for the Debtors' argument was that the payments that were sought to be invalidated, assuming they constituted "debts" of the Debtors, had not been proved in the Debtors' bankruptcies before the Annulment Orders were made. The issue before the court was whether an annulment order effectively decides that all the bankrupt's debts have been satisfied, or whether it only decides that the bankrupt's debts that had been proved before the annulment have been satisfied.

Statutory Basis for Annulment Orders

The statutory basis for annulment of a bankruptcy order is Section 33(1)(b) of the Bankruptcy Ordinance (Cap 6). This section provides that:

English Authorities on the Effect of Annulment Orders on Unknown Debts

The parties did not dispute that the general effect of an annulment order is that the bankrupt is put in the same position as if there had been no bankruptcy order made against him, but there appeared to be no Hong Kong authorities on the effect of annulment orders on debts which had not been proved before the annulment order was made. The English authorities are favourable to the Creditor.

In More v. More [1962] Ch 424 the court held that where an annulment order had been granted, a creditor who had not previously proved his debt could sue the debtor as soon as the bankruptcy was annulled.

The court in London Borough of Lambeth v. Simon [2007] BPIR 1629 held that in contrast with discharge from bankruptcy, there is no provision for annulment to have any effect on unknown debts.

As to commentary, Halsbury's Laws of England states that "an annulment order... does not debar a creditor, who has merely abstained from proving, from suing the debtor after the annulment, his right to sue no longer being suspended by the bankruptcy".

Difference Between HK and UK Legislation?

The Debtors contended that the Hong Kong legislation has a wider effect than the UK legislation. Whereas the UK provision says that an annulment order is granted where "bankruptcy debts" have been satisfied, the Hong Kong provision refers instead to "provable debts". Based on the difference in terminology, the Debtors argued that while the UK provision only covers debts already proved before the annulment of bankruptcy, the Hong Kong provision covers all debts that could possibly be proved in a debtor's bankruptcy. Because of this, the Liquidators had a duty to submit the Company's proofs of debt, and if they failed to do so, the Company would be barred from advancing its claim in respect of these debts after the annulment of bankruptcy.

Decision

Rejecting the Debtors' contention, the learned judge said that he could not see any real difference between the Hong Kong and UK provisions. It was held that the term "bankruptcy debts" in the UK legislation has the same meaning as "provable debts".

The learned judge also rejected the argument that the advertisement and gazetting of the annulment application gave the Liquidators constructive notice of it.

The learned judge said that he saw no reason why a creditor who had not proved his debts before the annulment order should be deprived of relief just because of the annulment of bankruptcy. His reasoning was that although a bankrupt can be discharged from liabilities over his unpaid debts, he is only entitled to the discharge after the bankruptcy has run its course. An annulment order puts the bankrupt in the position he would have been in if no bankruptcy order had been made at all. Therefore, a bankrupt who has obtained an annulment order should not be treated as if the bankruptcy had run its course.

It follows that the Liquidators were not prohibited from making the Unfair Preference Application by reason of the Annulment Orders. In the end, the learned judge allowed their application to invalidate the payments to the Debtors as unfair preferences.

Originally published 29 August 2013

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