Revised on 6 November 1996
LegCo Paper No. CB(1) 229/96-97
(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 Monday, 30 September 1996 at 9:00 am in Conference Room B of the Legislative Council Building

Members present :
    Hon Ronald ARCULLI, OBE, JP (Chairman)
    Hon Eric LI Ka-cheung, JP
    Hon Andrew CHENG Kar-foo
    Hon LAU Hon-chuen, JP
    Hon LEE Kai-ming
    Hon Bruce LIU Sing-lee
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai
    Hon Mrs Elizabeth WONG, CBE, ISO, JP
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 K F CHENG
    Senior Crown Counsel
    Mr Jeremy A Glen
    Senior Crown Counsel
    The Law Reform Commission of Hong Kong
Clerk in attendance :
    Ms Estella CHAN
    Chief Assistant Secretary (1)4
Staff in attendance :
    Mr Arthur CHEUNG
    Assistant Legal Adviser 5
    Miss Anita SIT
    Senior Assistant Secretary (1)6

I Confirmation of minutes of meetings

(LegCo Papers No. CB(1) 1857 & 2145/95-96)

1. The minutes of the meetings held on 10 June 1996 and 10 July 1996 were confirmed.

II Meeting with the Administration

(LegCo Papers No. CB(1) 2118, 2123, 2127, 2141 & 2146/95-96)

Minimum debt required for presentation of bankruptcy petition

2. Having noted the comments of the Director of Legal Aid as set out in the Administration’s response of 23 September 1996, members agreed that the minimum debt level should be $10,000 as in the proposed section 6(2)(a), instead of $20,000 as proposed by the Consumer Council.

Procedure for setting aside statutory demand

3. On whether a form of application to set aside a statutory demand should be served on the debtor together with the statutory demand, members took note of the views of the Head of the UK Insolvency Service in this regard. Members had no strong view on this matter and agreed to maintain the proposed arrangement where the debtor needed to obtain the necessary form from the Judiciary if he wished to have a statutory demand set aside.

Tax secrecy

4. In response to the Chairman, Mr Eric LI said that as the draft CSAs, some of which were concerned with tax secrecy, had just been provided by the Administration, he had yet to discuss them with the Hong Kong Society of Accountants (HKSA). He would report to the Bills Committee the views of HKSA on the draft CSAs in respect of tax secrecy.Mr Eric LI

Potential abuse of proposed bankruptcy proceedings

5. A member referred to paragraph 2 of the letter from the Head of the UK Insolvency Service where it was stated that in UK, the statutory demand system for insolvency proceedings had been introduced (in 1986) with appropriate safeguards against potential abuse, and asked the Administration to elaborate on the "potential abuse" mentioned. In response, Mr Michael E Brown said that the potential abuse was the possibility of creditors serving a statutory demand over non-existent claims or disputed debts. Persons found to have erroneously petitioned based on such a statutory demand would be penalised for costs at the hearing. In reply to the member’s further enquiry, Mr Brown advised that the UK Insolvency Service did not consider abuse by creditors of the statutory demand procedure to be a serious problem.

6. Regarding the situation where a debtor departed from Hong Kong before or after a statutory demand was served to him in order to avoid bankruptcy proceedings, Mr Brown acknowledged that owing to the ease of mobility of people in Hong Kong, this situation often occurred and the authorities could do little about it. He pointed out that absconding debtors were not a problem peculiar to the proposed bankruptcy proceedings.

Conditions to be satisfied in respect of debtor for bankruptcy petition

7. The Chairman enquired whether the reference to the expression, "has carried on business in Hong Kong", in the proposed section 4(1)(c)(ii) would include those persons having engaged in "one-off" business activities such as the holding of a concert or a sporting event. In response, Mr Robin Hearder advised that persons coming in for this kind of business activities would need to engage the services of a business registered in Hong Kong to conduct business. Such persons should therefore satisfy the condition either under the proposed section 4(2)(a) or section 4(2)(b), which partly defined the reference of the proposed section 4(1)(c)(ii) to a debtor carrying on business.

8. Mr Hearder also advised that the Law Reform Commission (LRC) had looked into the issue extensively in the context of the jurisdiction of the court. There had been a proposal to extend the jurisdiction to any debtor who had been personally present in Hong Kong for one day at any time during a period of six months. The Insolvency Subcommittee of the LRC decided that this proposal was not acceptable because it was against the ordinary concept that the court should only have jurisdiction over persons who had established some sort of residency or had carried on business in Hong Kong, or were personally present in Hong Kong at the time of the petition against him.

Time limit for adjudication of proofs of debt

9. Regarding the statutory time limit for adjudication of proofs of debt in Australia, UK and Singapore, members took note of the information provided by the Administration that in these jurisdictions, there might be a time limit for the adjudication of proofs of debt (14 days in Australia, 7 days in UK and no limit in Singapore), in whole or in part, after the trustee had given a notice of intention to declare a dividend. However, there was no time limit for the adjudication of the proofs submitted before a trustee gave notice of intention to declare a dividend.

10. Regarding the implications of shortening the proposed four-year adjudication period under the proposed section 34(4A), Mr Hearder advised that as set out in the Administration’s response earlier, out of the 237 dividend distributions made to creditors in bankruptcy cases from 1 April 1993 to 31 March 1996, 132 dividend distributions were made over four years after the proofs of debt were filed. The main reason for the large number of cases requiring over four years before dividend was distributed was that in many cases, the Official Receiver (OR) had to collect monthly income contributions by bankrupts to their estates and it often took a long period to accumulate a reasonable amount to justify a declaration of dividend, which was itself a costly procedure.

11. Mr Hearder also advised that the intention of the proposed four-year adjudication period under the proposed section 34(4A) was to provide a remedy for creditors in respect of claims for which the trustee kept requesting further evidence without making any final decision. At the moment a creditor had no remedy against the trustee except as an "aggrieved creditor" under section 83 to apply to the court, which however was not appropriate if the trustee had made no decision which could be appealed against.

12. Mr Eric LI expressed the view that the legislation should stipulate a reasonable time limit for the trustee’s adjudication of proofs of debt so that creditors could have a general idea of when a decision on their claims would be made. Having noted the explanation by Mr Hearder above, he still considered that the proposed four-year time limit was unreasonably long. He appreciated that some cases might require such a long period for adjudication but those cases were probably exceptional.

13. In order to enable the Bills Committee and concerned professionals to further consider the matter, members requested and the Administration agreed to provide substantive information on the resource implications of shortening the adjudication period to three years.Admin

14. In response to Mr Eric LI’s request, Mr Hearder agreed to provide the performance pledges of the OR’s Office for members’ reference. OR

15. In response to the Chairman’s enquiry on whether and how the three-year automatic discharge provision (for a first time bankrupt subject to there being no objection by creditors or the trustee) was related to the proposed four-year adjudication provision, Mr Hearder advised that the LRC treated these as two separate issues: the issue of discharge was concerned with a bankrupt’s rehabilitation while the adjudication period was concerned with practicalities of administration. Mr Brown added that the four-year adjudication provision was concerned with the administration of a bankrupt’s estate while the three-year discharge provision was concerned with the bankrupt himself. There was no necessary relationship between the two issues.

16. Members felt that while the LRC regarded the issues as independent from each other, it was difficult for members of the public and creditors to conceive why the law would allow a situation where a bankrupt was discharged but the administration of his estate had not yet been completed. In response, Mr Tisman explained that a bankrupt discharged might be required to continue to make payments to pay off his creditors. Mr Brown added that the administration of the bankrupt’s estate could go on after the discharge of the bankrupt. Members considered that treating the automatic discharge period and the adjudication period as two distinct issues was not reconcilable in the minds of the public and creditors. The Chairman requested and the Administration agreed to provide a more substantive explanation in this regard.

(Post-meeting note: The Administration has provided an explanation for its position in its letter of 17 October 1996 which was circulated vide LegCo Papers No. CB(1) 149 & 175/96-97 dated 18 & 24 October 1996.)

Admin

Administration costs

17. In response to the Chairman’s enquiries, Mr Hearder said that the general guideline for early discharge was that a bankrupt could apply for early discharge if he had paid up at least 50% of his debt. The bankrupt did not need to bear the costs of administering his estate, though he had to pay court fees to apply for his early discharge. The Chairman expressed concern about the actual amount of dividend creditors could generally obtain. Mr Hearder undertook to provide information on the dividend payouts to creditors in bankruptcy cases.OR

18. In reply to the Chairman, Mr Hearder said that it was theoretically possible that the cost to the OR’s office in a bankruptcy case was higher than the dividend paid out to creditors. However, practically, the OR’s Office at most only took about 20% of the assets realised as the administration fees.

19. A member expressed concern that in bankruptcy and company winding-up cases, professional charges incurred for administration were often very high and thus had significantly reduced the amount available for payouts to creditors. He enquired if at present there was any mechanism to control the professional charges in insolvency cases. Another member shared his concern and opined that there should be an agreed basis for assessing whether the charges by insolvency practitioners were excessive.

20. In response, Mr Hearder advised that trustees of bankruptcy cases and company liquidators were appointed by the court on standard rates applicable to the time charges of the respective firms. For company liquidation, there was a contracting-out scheme and an agreed standard rate of charges. For bankruptcy cases, no such scheme was established yet, but there had been a few cases in which private practitioners were appointed. Under the relevant provisions, creditors could appeal to the OR against unreasonable charges by insolvency practitioners and the OR might put the case to the court if he also considered the charges unreasonable. Mr Hearder however remarked that it was difficult to prove that an insolvency practitioner had not worked for the case concerned during those hours as set out in the time sheet he submitted. He said that this was a difficult issue and was being studied by the Insolvency Subcommittee of the LRC. The relevant report was expected to be released in early 1997.

21. The Chairman said that the problem also lay in the fact that it was not possible to ascertain in advance how much work would be involved in any case of bankruptcy or company liquidation. If the charges of insolvency practitioners were to be capped, it might then be very difficult for the OR to find private practitioners willing to take up insolvency cases.

22. Mr Hearder advised that the OR’s Office had attempted to devise a system to cap the charges of insolvency professionals. Under the proposed system, all the firms who were approved insolvency practitioners would have to submit their rate quotes once a year and the OR would take an average rate and advise the practitioners that that was the maximum rate the OR would approve. It would be provided that if a practitioner felt that the case concerned was complicated and thus the rate was insufficient, the practitioner could apply to the court to have the rate raised. The OR had consulted HKSA on the proposed system but HKSA objected to putting a maximum rate into agreements as this was considered to conflict with the profession’s ethics. Thus, at present, it had to be left to the professional integrity of the firms concerned to charge at rates that were commensurate with the complexity of the cases concerned. Mr Eric LI said that insolvency practitioners were ready to make rate quotes but it was not practical to cap their charges in advance, since in most cases, it was not possible to ascertain the level of complexity and the amount of work that would be involved.

Provision of documents by the Administration

23. The Chairman noted that most of the documents provided by the Administration for the meeting were in English only. He asked the Administration to provide the Chinese version of the documents as soon as possible and reminded that it had been an agreed arrangement that the Administration should provide its papers in both Chinese and English before meetings.Admin

24. The Chairman noted that apart from the correspondence with the Hong Kong Association of Banks (HKAB), the Administration had written to a number of bodies to consult them on the legislative proposals in March 1996. He requested that the Bills Committee be provided with copies of the correspondence with those bodies which had responded with comments. Admin

(Post-meeting note: A summary of principal representations and the Administration’s responses was provided by the Administration and circulated to members vide LegCo Paper No. CB(1) 140/96-97 dated 17 October 1996. The Chinese version of the summary was tabled at the meeting on 18 October 1996.)

25. Regarding the correspondence with HKAB, members requested the Administration to differentiate the issues on which HKAB and the Administration had reached a consensus and those on which no consensus had been reached. In respect of those issues HKAB had raised in their early letters but not in subsequent ones, the Chairman suggested that the Administration write to HKAB to ascertain HKAB’s position on those issues.Admin

(Post-meeting note: At the request of the Administration and with the concurrence of the Chairman, a letter was sent on 12 October 1996 in the name of the Bills Committee to invite HKAB to clarify its position on the issues raised.)

III Date of next meeting

26. Members agreed that the next two meetings of the Bills Committee would be held on Friday, 18 October 1996 and Thursday, 31 October 1996, both at 10:45 am. The Bills Committee would start to examine the Bill clause by clause at the next meeting.

27. The meeting ended at 10:30 am.
Legislative Council Secretariat
6 November 1996

Last Updated on 10 December 1998