Company and Insolvency — Curious nightmare of bankrupt came true: Court allowed annulment of bankruptcy order made 19 years ago
A debtor who had absconded was declared bankrupt in 2005, and his bankruptcy discharged automatically in 2009. He now relies on the discharge as a defence to the debt claim. Can the creditor nonetheless recover the debt by annulling the bankruptcy order made 19 years ago?
This was the conundrum in Re Zhan Xiangming [2024] HKCFI 2889, a recent case done by Richard Yip (led by John Scott SC and with Enoch Fong) and Eviana Leung from Nixon Peabody CWL who have been representing the creditor since the leave stage. Against a remarkable factual matrix, the Court allowed the creditor’s application to annul the bankruptcy order on the basis that the order was made without jurisdiction in the first place.
The decision not only elucidates some of the principles on annulment which have not been previously canvassed by Hong Kong courts, but also examines – beyond the bankruptcy context – the enforceability of a contractual clause which serves to postpone the operation of limitation period, which is of great importance and relevance to practitioners.
Factual background
On around 27 May 2002, the bankrupt (“Zhan”) signed a personal guarantee (“Guarantee”) in favour of the creditor (“Gracewood”) securing a debt of USD16,626,816.86 (“Debt”) owed by two PRC companies. Clause 8 of the Guarantee provides that the limitation period for the claim against Zhan shall begin to run from the date Gracewood makes the demand for repayment.
The PRC companies originally had a massive liquefied petroleum gas business in Guangdong, which subsequently collapsed in 2002. Zhan disappeared from Mainland China ever since.
On 6 May 2005, a separate creditor presented a bankruptcy petition against Zhan in Hong Kong. The bankruptcy order was made in his absence on 6 July 2005 (“Bankruptcy Order”).
On 6 July 2009, Zhan was considered automatically discharged from bankruptcy.
In around 2021, through investigation conducted by a private investigator, Gracewood knew for the first time that Zhan had been residing in and has never left New Zealand since 2002.
On 12 April 2022, Gracewood commenced a High Court action in Hong Kong against Zhan for repayment of the Debt. In parallel, Gracewood obtained freezing orders and ancillary orders against Zhan in the High Court of New Zealand. In both sets of proceedings, Zhan raised the argument that his liability in relation to the Debt had been extinguished upon his discharge from bankruptcy.
In this connection, Gracewood made an application to annul the Bankruptcy Order pursuant to s.33(1)(a) and s.33(6) of the Bankruptcy Ordinance (Cap. 6) (“BO”).
By the Decision of DHCJ H. Au-Yeung (as he then was) dated 21 November 2023, Gracewood was granted leave to apply for annulment. This was the first decision in Hong Kong which addressed the threshold for grant of leave under s.33(6) of BO.
At the annulment hearing, the issues before the Court were as follows:-
(1) The principles applicable to an application for annulment of a bankruptcy order;
(2) Whether Gracewood was an “interested person” within the meaning of s.33(6) of BO;
(3) Whether the Bankruptcy Order ought not to have been made;
(4) If the Bankruptcy Order ought not to have been made, whether the discretion should be exercised so as to annul the Bankruptcy Order.
The decision
Principles on annulment
DHCJ MC Law SC summarised among others the following principles:
(1) Section 33 of BO provides for the circumstances in which the court may annul a bankruptcy order. Under s.33(1)(a), a bankruptcy order ought not to have been made where the court has no jurisdiction to make the order in the first place.
(2) Section 33(3) of BO, which is based on s.282(3) of the Insolvency Act 1986, gives the Court power to annul a bankruptcy order even after the bankrupt has been discharged. This gives a “broad scope for the rectification of injustice” as explained by the Hong Kong Law Reform Commission in its Report on Bankruptcy in May 1995.
(3) Where the ground for annulment goes to a petitioner’s entitlement to present the petition such that the court lacks jurisdiction to make the bankruptcy order in the first place, it would not be an appropriate exercise of the discretion to withhold annulment.
The Deputy Judge then referred to the English case of Raiffeisenlandesbank Oberosterreich AG v Meyden [1] followed by Deutsche Apotheker-und Arztebank EG v Dr Ralph Rainer Leitzbach & Anr [2]. In Meyden, Nugee J (as he then was) held that whilst s.282 of the Insolvency Act 1986 (materially equivalent to s.33 BO) confers a true discretion, where the bankruptcy order is made without any jurisdiction at all, the Court has no choice but to set the order aside. Moreover, Nugee J observed that when a bankruptcy order was 10, 15 or 20 years old, it might be very difficult for anybody, certainly a creditor whose claims had ceased to be, in practical terms, enforceable, to claim that they were a person affected by such an order, such that the court retains a discretion to refuse to entertain an annulment application.
Interested person
Zhan argued that Gracewood was not an “interested person” to apply for annulment under s.33(6) of BO because its claim under the Guarantee was time-barred. DHCJ MC Law SC rejected this argument and reasoned as follows:-
(1) The English cases demonstrate that to qualify as an interested person, it is not necessary for an applicant to prove that its underlying claim against the bankrupt would prevail at the end of the day. However, if the claim has already been time-barred at the time of the annulment application and is doomed to fail, the applicant would not have any “pecuniary or financial interest” in annulling the bankruptcy order.
(2) Here, under Clause 8 of the Guarantee, the parties had expressly agreed that the limitation period would only start to run from the date of demand by Gracewood.
(3) Zhan’s contention that Clause 8 should be void for being contrary to public policy was misconceived. Based on the principles derived from the High Court of Australia’s unanimous decision in Price v Spoor delivered in 2021[3], the way the limitation statute gives effect to the finality of litigation is by conferring a right on an individual defendant to elect to plead a limitation period. It is always left to him to choose whether to forgo that right. A contractual agreement to exclude a statutory limitation period is entirely compatible with the policy underpinning the limitation statute and the broad principle of freedom of contract.
(4) As Gracewood submitted, the courts have long recognized tolling or standstill agreements.
(5) Based on the above principles, Clause 8 is legally binding and enforceable.
(6) Zhan’s argument that a term should be implied into the Guarantee such that Gracewood must serve the demand for repayment within a reasonable time was rejected. It is trite that a term cannot be implied into an agreement when it is inconsistent with its express terms.
The Bankruptcy Order was made without jurisdiction
On the evidence, Zhan had never been domiciled in Hong Kong, which was the sole jurisdictional basis on which the Petition was presented. While Zhan argued that he had carried on business in Hong Kong “at any time in the period of 3 years ending with [the day on which the petition was presented]” under s.4(1)(c)(ii) of BO, he and his other witness did not attend court for cross-examination and their affirmation evidence was inadmissible. There was nothing to show that Zhan was carrying on business in Hong Kong at the relevant period, nor evidence on basic matters such as the nature of his business, let alone his activities or level of participation. The conditions for the bankruptcy court’s exercise of jurisdiction under s.4 of BO were not met.
Discretion
Zhan contended that the Court should exercise its discretion not to annul the Bankruptcy Order because of the long delay of Gracewood. The Court rejected this argument and effectively held that it should not withhold annulment when the Bankruptcy Order was made without jurisdiction and Gracewood’s claim was not time-barred. Furthermore, it was Zhan who had absconded and could not be located. Gracewood had been trying to locate him throughout the years and once Zhan was found, Gracewood had quickly commenced the High Court Action in 2022. Zhan’s criticism of delay was unfounded.
In addition, there was no evidence that the annulment of the Bankruptcy Order would cause prejudice to other creditors (with the Official Receiver and the petitioner having taken a neutral stance to the annulment application) or to Zhan.
Accordingly, Gracewood’s annulment application was allowed, and the bankruptcy petition was dismissed.
Significance
This case is unprecedented and significant in the following respects:
(1) Drawing on local decisions and English cases not previously cited in Hong Kong, the decision illustrates that where a bankruptcy order is made without jurisdiction in the first place, the mere fact that an annulment application is brought after a long lapse of time from the date of the bankruptcy order does not prevent the Court from ordering annulment.
(2) It deals with the novel legal issue of the interplay between the underlying claim of the creditor being time barred (although the Court found that Gracewood’s claim was not so) and the requirement of “interested person” for annulment. It endorses the observation in Meyden to the effect that a creditor whose claim is time barred does not have the requisite financial or pecuniary interest to apply for annulment, while recognising that he does not have to prove that his underlying claim against the debtor would eventually prevail for him to qualify as an interested person.
(3) It is the first Hong Kong case which applies the Australia apex court’s decision of Price v Spoor. It confirms that contractual clauses which serve to postpone the commencement of limitation period can be enforceable, an issue which surprisingly has rarely been touched upon by Hong Kong courts (other than in e.g., Chen Jinhui v Wong Kam San and Others [4], paras.174-176).
[1] [2016] EWHC 414 (Ch)
[2] [2018] EWHC 1544 (Ch)
[3] (2021) 270 CLR 450
[4] [2021] HKCFI 710
Richard Yip
“One of the strongest junior barristers around, his stand-out qualities include an excellent handle on the detail, an insightful legal mind, and sound commercial sense.”
Legal 500 Asia-Pacific 2021 – 2025, Commercial Disputes — Leading Juniors, Tier 1
Richard has a broad civil practice with a focus on shareholder disputes, commercial litigation, financial regulation, competition law and personal injuries. He joined Denis Chang’s Chambers in 2011. Prior to joining the bar, Richard was a corporate finance solicitor at Herbert Smith Freehills.
He represented four respondents in the second case before the Hong Kong Competition Tribunal, where the economic efficiency defence was raised for the very first time in Hong Kong. He was also involved in a number of substantial shareholder disputes, including Acropolis Ltd v W&Q Investment Ltd, 2018 HKCA 379 (appeal against interlocutory injunction concerning the EGM voting results of a listed company) and Waddington Ltd v Chan Chun Hoo Thomas, HCA 3291/2003 (trial of a double derivative action).Richard is also actively involved in the community and academia. He is a part-time lecturer at the University of Hong Kong.
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This article was first published on 27 November 2024.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photographs which appear in this article are included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related. The views and opinions expressed in this article/material are solely those of the members authoring it and do not necessarily reflect the official policy or position of Denis Chang’s Chambers, or of any other member or members of Denis Chang’s Chambers.