Court of Final Appeal declares section
30A(10)(b)(i) of the Bankruptcy Ordinance, which postpones the time of a bankrupt's discharge whenever he or she leaves Hong Kong without notifying the trustee in bankruptcy, as unconstitutional

On 20 July 2006, the Court of Final Appeal delivered its Judgment in Re: Chan Wing Hing and Re: Lin Hai San (FACV Nos. 7 and 8 of 2006). The Court of Final Appeal, by majority, allowed the appeals by the Official Receiver and made a declaration that section 30A(10)(b)(i) of the Bankruptcy Ordinance, Cap. 6 ("the Ordinance") is unconstitutional. 

Legislative scheme regulating discharge from bankruptcy

It may be helpful first to briefly set out the legislative scheme regulating discharge from bankruptcy. Unless specified otherwise, references to sections hereinafter are to sections in the Ordinance. 

According to sections 30A(1) and (2), a bankrupt can be discharged automatically by the expiration of a certain period of time ("relevant period") after the bankruptcy order is made against him ("the commencement of the bankruptcy"). For a person adjudged bankrupt for the first time ("first-time bankrupt"), the relevant period is four years. For a person who has been previously adjudged bankrupt ("previous bankrupt"), the relevant period is five years. 

However, the relevant period may be suspended from running in the following cases:

On the other hand, a bankrupt may apply for an early discharge under section 30B.

The interpretation and constitutionality of section 30A(10)(b)(i) were called into question in Re: Chan Wing Hing and Re: Lin Hai San.

Factual background of Re: Chan Wing Hing and Re: Lin Hai San

Bankruptcy orders were made against Mr. Chan Wing Hing and Mr. Lin Hai San. Both are first-time bankrupts and the Official Receiver is their trustee. They are both permanent residents enjoying right of abode and were present in Hong Kong on the dates of their respective bankruptcy orders. Subsequently, both made frequent trips to the Mainland without notifying the Official Receiver of their departure or return. For the great majority of their trips, they were absent for less than a day.

Before Mr. Chan and Mr. Lin were automatically discharged from bankruptcy after the expiration of the relevant period of four years, the Official Receiver applied for an order under section 30A(3) on the ground of their failure to prepare annual reports of their earnings and acquisitions for the trustee. In the case of one of them, the Official Receiver relied on the further ground of his unsatisfactory conduct. 

First Instance 

When the Official Receiver's applications first came before Master Kwang, Master Kwang raised the preliminary point of whether, in view of the trips made by Mr. Chan and Mr. Lin to the Mainland without notifying the Official Receiver, section 30A(10)(b)(i) applied. Master Kwang held that on the proper interpretation of section 30A(10)(b)(i), a bankrupt is required to notify his trustee of his itinerary and where he can be contacted if he intends to leave Hong Kong for whatever period; failing which his period of bankruptcy would cease to run until the bankrupt physically returns to Hong Kong and notifies his trustee of his return.

Master Kwang therefore ruled that the relevant period of Mr. Chan and Mr. Lin had ceased to run from the very first day they left Hong Kong without notifying the Official Receiver. As such, the Official Receiver's applications were premature and therefore dismissed. 

Court of Appeal  

The Official Receiver appealed against the Master's decision and contended that the Master's interpretation of section 30A(10)(b)(i) was incorrect, and was inconsistent with the bankrupt's right of the freedom to travel.

The Court of Appeal held that the Master's interpretation of section 30A(10)(b)(i) was essentially correct, but absences of less than a day should not be counted. On the question of constitutionality, the Court of Appeal held that section 30A(10)(b)(i) was constitutional for the reason that although it restricts the freedom to travel, the restriction is not disproportionate to the need to protect the rights of creditors.

The Court of Appeal, however, ruled that the Master's summary dismissal of the applications by reason simply that the 4-year relevant period had not expired was not a proper exercise of discretion. The Official Receiver's appeals were therefore allowed and the cases were remitted back to another Master to determine the period of absence and then whether the relevant period should be extended under section 30A(10)(b)(i).

Court of Final Appeal

The Official Receiver appealed against the Court of Appeal's decision and contended that the Court of Appeal's interpretation of section 30A(10)(b)(i) was incorrect, and if such contention failed, then the provision was unconstitutional.

It is unusual for a government agency, particularly one which played a major role in promoting the legislation in question, to assert that a provision of the resulting Ordinance is unconstitutional. There is an administrative reason for this. The operation of section 30A(10)(b)(i) as interpreted by the Court of Appeal would mean that the trustee, when determining whether the relevant period has expired, has to check whether the bankrupt had left Hong Kong, and if so, whether he had notified the trustee, and if not, the length of his absence and whether and when he had notified the trustee of his return. It could impose a heavy administrative burden on the trustee having regard to the fact that there were some 75,730 undischarged bankrupts in mid-2005, of whom some 72,352 were being dealt with by the Official Receiver.

The interpretation issue

The Official Receiver submitted that section 30A(10)(b)(i) only operated as a ground of objection to the bankrupt's discharge under section 30A(3) and (4) and the maximum period of bankruptcy was not more than 8 years as intended by the legislature. The Court of Final Appeal rejected this submission, on the basis that it is plain from the use of the word "Notwithstanding" in section 30A(10)(b)(i) that it overrides sections 30A (1) to (3). The Court of Final Appeal therefore held that the Court of Appeal's interpretation of section 30A(10)(b)(i) is correct.

The constitutionality issue

As guaranteed by Article 31 of the Basic Law and Article 8(2) of the Hong Kong Bill of Rights Ordinance, Cap. 383, everyone shall have the right of freedom to travel. According to Article 39(2) of the Basic Law and Article 8(3) of the Hong Kong Bill of Rights Ordinance, any restriction on this right must satisfy two requirements:

As for the first limb of the proportionality test, the Court of Final Appeal held that the restriction on the right to travel in section 30A(10)(b)(i) is for the purpose of keeping the bankrupt on the trustee's radar in order to facilitate effective administration of the bankrupt's estate and is therefore rationally connected to the protection of the rights of creditors.

Turning to the second limb of the proportionality test, the Court of Final Appeal, with Mr. Justice Ribeiro PJ dissenting, considered that the restriction on the right to travel in section 30A(10)(b)(i) provides for both notification and the sanction in the event of non-notification. The majority held that the sanction is a harsh one because once triggered, the relevant period is suspended indefinitely until the bankrupt returns to Hong Kong and notifies the trustee of his return. It operates indiscriminately irrespective of the reason for the bankrupt's failure to notify and the circumstances. It leaves no discretion to the court to disapply the sanction or to mitigate its consequences, however meritorious or deserving the circumstances. On the other hand, the trustee and the creditors are already able to object to the bankrupt's discharge on grounds including his failure to co-operate and his unsatisfactory conduct under section 30A(3) and (4). Applying a generous approach to the interpretation of the right to travel, the Court of Final Appeal, by majority, held that the restriction on the right to travel in section 30A(10)(b)(i) goes beyond what is necessary for the protection of the rights of creditors.

Mr. Justice Ribeiro PJ, in his dissenting judgment, took the view that section 30A(10)(b)(i) constitutes a legitimate and proportionate limitation on the freedom to travel. The only requirement which it imposes on the bankrupt when he wishes to travel is to notify the trustee of his itinerary and contact details prior to the departure, or in default, upon return. It is the notification requirement alone, and not some assumed unmitigated and open-ended adverse consequences flowing from assumed failure to comply with the requirement, which is to be weighed in the proportionality balance.

Accordingly, the Court of Final Appeal, by majority, made a declaration that section 30A(10)(b)(i) is unconstitutional and remitted the cases to the Master to consider the Official Receiver's objections to discharge under section 30A(3) and (4).

The effect of Re: Chan Wing Hing and Re: Lin Hai San

Section 30A(10)(b)(i) has ceased to have force unless and until appropriate amendments are made to it by the legislature so as to render it "constitutional". In effect, when a bankrupt leaves Hong Kong without notifying his trustee, his relevant period does not automatically cease to run. It enables the trustee to ascertain easily whether the relevant period has expired and hence the bankrupt has been automatically discharged without having to go through all the Immigration Department records and its internal records.

The trustee and the creditors can still seek to extend the period of bankruptcy of a bankrupt by an application under section 30(A)(3) on one or more of the grounds set out in section 30(A)(4) including his failure to co-operate, his unsatisfactory conduct, or his failure forthwith to return to Hong Kong following a request to do so from the Official Receiver or the trustee. It will then be the decision of the court to determine whether the relevant period should be suspended from running for a further period and the length of such further period. .

An application under section 30(A)(3) will inevitably incur additional costs of the trustee. Although costs are usually ordered to be borne by and paid out of the estate of the bankrupt, in most, if not all, major cases, they have to be funded by the creditors before sufficient assets of the bankrupt can be recovered. Therefore, the striking down of Section 30A(10)(b)(i) may cause more difficulties for the trustee to obtain funding from the creditors if the trustee wishes to extend the period of bankruptcy of the bankrupt.

One point to note is that the trustee may still continue to carry out at least certain of his functions even after the discharge of a bankrupt from bankruptcy on the following bases:

• Section 30A(8): The bankrupt shall continue to give such information respecting his affairs; and attend on the trustee at such times, and do such other things, as the trustee requires for the purpose of completing the administration of the estate, failing which, he shall be guilty of a contempt of court and may be punished accordingly on the application of the trustee.
• Section 32(2): The discharge has no effect on the functions, so far as they remain to be carried out, of the trustee and the operation of the provisions of the Ordinance for the purposes of carrying out those functions.

These provisions are worth considering before the trustee makes an application under section 30(A)(3), although their full extent is open to interpretation.

Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.