The Hong Kong approach where debtors lodge a petition for their own bankruptcy – how to prevent abuse of process – JD Supra

Summary

If a person presents a petition for their own bankruptcy (self-petition), are there any safeguards to ensure that the self-petition is genuine, as opposed to a cynical device by the person to buy themselves time to pay, or to give themselves some negotiating position with their creditors?

This interesting question was considered in a recent Hong Kong judgment.

On 6 December 2021, at a hearing of four debtors petitions (with the neutral citation [2021] HKCFI 3732), the Court dismissed each of the self-petitions on the ground that it constituted an abuse of process.

On 10 December 2021, the Court gave its reasons for judgment, and the judgment gives helpful guidance as to the likely judicial approach when dealing with self-petitions in the future.

The Court considered four debtors petitions which shared a similar fact pattern - Re So Tsz Man (HCB 7033/2020), Re Lee Wing (HCB 7299/2020), Re Tam Wai Yiu (HCB 7569/2020) and Re Qiu Wenjun (HCB 3930/2021)::-

Section 10 of the Bankruptcy Ordinance (Cap. 6) (BO) provides as follows:-

Grounds of debtors petition

The Court emphasised that presenting a self-petition is a serious matter.

When filing a debtors petition for bankruptcy, the debtor is required to complete:-

These procedural requirements under the Forms Rules are designed to ensure that a debtor presents a petition to seek a bankruptcy order only if they (1) are unable to pay a debt and (2) genuinely wish to seek a bankruptcy order.

The statutory purpose of section 10 of the BO is to permit an insolvent debtor to invoke the bankruptcy jurisdiction where they are unable to pay their debts. By invoking the bankruptcy jurisdiction, however, the debtor gives up all their property in return for being freed from the burdens of their debts and, upon discharge from bankruptcy, to make a clean start.

The statutory scheme of bankruptcy is designed to avoid multiple executions and other forms of enforcement against the debtors assets, so as to ensure that all creditors will be dealt with fairly and equitably through the bankruptcy process, and to achieve a fair and orderly distribution of the debtors assets amongst their creditors.

Section 5(3) of the BO provides that the Court has a general power to dismiss or a stay a petition if it appears to it appropriate to do so on the grounds that there has been a contravention of rules or for any other reason.

The Court in Re So Tsz Man indicated that the Court should dismiss a self-petition as an abuse of process if it is shown that the debtor is able to pay their debts.

In the present case, the Court said it was clear that the debtors did not intend to seek genuinely a bankruptcy order from the Court. Instead, they used self-petitions as the means to suspend their obligations to make repayment of the debts and to negotiate with the creditors on the terms of repayment.

The Court emphasised that, it is not open to a debtor to make a request for a bankruptcy order in the self-petition if they do not in fact intend to seek the order when the petition comes to be heard by the Court. If a debtor does not wish the Court to make a bankruptcy order against him, they should not present a self-petition in the first place. Further, it is not the function of a self-petition to allow a debtor to achieve a moratorium with their creditors. The debtor is free to negotiate with their creditors, and does not need to maintain a self-petition to carry on such negotiations.

The Court regarded it was an abuse of process for a debtor to present a self-petition but then to seek to postpone the determination of the petition by not attending the scheduled hearing(s) or by asking for an adjournment for the purpose of negotiating with their creditors.

As a result, the Court in Re So Tsz Man dismissed each of the four self-petitions for being abusive of the Courts process.

The Court expressed the view that it is a matter of concern that many debtors had chosen to present a self-petition, which process comes at a not insignificant cost to the debtor, including (1) a deposit to the Official Receiver pursuant to rule 52(1)(a) of the Bankruptcy Rules (Cap.6A) (currently at $8,000), (2) a filing fee of $1,045 to the Court and (3) other fees which may be charged by the agents or solicitors for assisting the debtor in the preparation and filing of the petition and the statement of affairs.

To ensure that in future debtors will not be misled by others as to the proper purpose of self-petitions, and to prevent further abuse of process, the Court (save in exceptional circumstances ) is likely to adopt the following approach in dealing with self-petitions:

In all of the above scenarios, the costs of the Official Receiver will be borne by the debtor and be paid out of the deposit. The Court reminded debtors who do not wish to seek a bankruptcy order that it will be to their advantage to withdraw the self-petition at the hearing before Master so as to minimise the costs payable to the Official Receiver.

On 10 December 2021 (the same day as the handing down of the reasons for judgment in Re So Tsz Man), the Official Receivers Office (ORO) announced an Important Notice for Petitioner in Bankruptcy Proceedings. The ORO reminded, among others, debtors in self-petition cases and their legal representatives of their duties to ensure their bankruptcy petitions are prosecuted efficiently and expeditiously. Their duties include but are not limited to the following:-

The ORO further reminded potential self-petitioners and their advisers that any petitions presented that (a) are not in compliance with the relevant requirements or (b) amount to an abuse of process (e.g. the bankruptcy proceedings being invoked in an improper manner or for an improper purpose such as using it as a means for negotiation with creditors) are liable to be dismissed by the court with costs ordered against the debtors in self-petition cases.

Re So Tsz Man, together with the OROs announcement, serve as a timely and important reminder that the self-petition is a tool which can employed only be under specific conditions. Debtors should obtain proper legal advice before presenting a self-petition to avoid dismissal of the petition and adverse costs consequence.

[View source.]

View original post here:

The Hong Kong approach where debtors lodge a petition for their own bankruptcy - how to prevent abuse of process - JD Supra