The Bankruptcy (Amendment) Ordinance (the “Ordinance”) was passed in April in response to certain provisions in the Bankruptcy Ordinance being struck down as unconstitutional. The Ordinance comes into effect from 1 November 2016 and will affect all bankruptcy orders made after that date.

The present regime
The current bankruptcy regime provides for automatic discharge of bankruptcy and the required period of time varies among first time and repeat bankrupts, subject to, among other things, a regime that allows the deferral of the automatic discharge if bankrupts leave Hong Kong.

If a bankrupt (i) leaves Hong Kong before the commencement of bankruptcy; (ii) leaves Hong Kong after the commencement of bankruptcy, and without notifying the trustee of their itinerary and contact details or (iii) failing to return to Hong Kong after bankruptcy has started, the running of time required for automatic discharge will be suspended until the bankrupt returns to Hong Kong and he notifies the trustee in bankruptcy of the return.

The NEW regime
The new regime, providing for the non-commencement order, will displace the current regime.

The system of “initial interview” is introduced. It is intended to increase the transparency of the bankrupt’s estate and hence allow a more efficient administration of the estate. A trustee can request the bankrupt to attend in person the initial interview with the view of obtaining information of their financial affairs, dealings and property in Hong Kong. If the bankrupt fails to comply and the administration of the estate is hence prejudiced, the trustee can apply to the Court for an order (with conditions as the Court thinks fit) to treat the relevant period for automatic discharge as not commencing to run. The order can be applied within 6 months of the date of the bankruptcy order. The accrual of time will not commence until the order is discharged and all conditions are complied with. The bankrupt can object to the application.

Once the bankrupt has complied with the order, the trustee in the estate must notify the Court within14 days and time for the automatic discharge will start to run from the date of actual compliance.

This is a very welcomed move forward in improving on the current bankruptcy regime. The new regime can provide disincentive to bankrupts from deliberate non-cooperation with the trustee or absconding, and also allow the trustee to obtain more relevant information on the outset in the administration of the estate.

In an interlocutory application, the Defendant and the Plaintiff reached terms on the mutual undertakings which were included as part of a Court Order. The undertakings in question were 1) the Defendant was to maintain the sum of RMB 45,000,000 at a bank account(“the First Undertaking”) and 2) the Defendant was to provide the Plaintiff weekly reports of the status of the assets at issue(“the Second Undertaking”).

The Plaintiff applied to commit the Defendant for contempt of Court for his breach of two undertakings. At the Court of First Instance, it was held that the Defendant acted in contempt. The Defendant appealed to the Court of Appeal.

The First Undertaking

The CFI judge found that the sum in the agreed amount was not properly deposited in the account as agreed by the parties. The CFI characterized the conduct of the Defendant as “deliberate and contumacious”.

Interestingly, the Court of Appeal adopted a purposive approach and rejected the CFI’s finding that the First Undertaking was intended to be the security for the Plaintiff’s claim. Moreover, there was not any evidence of the discussion between the parties to work out an agreement for the designated account. In light of these uncertainties, the First Undertaking was too unclear to be enforceable.

The Second Undertaking
The Plaintiff applied to amend the originating summons so that further alleged breaches of the Second Undertaking were to be considered by the Judge, which was opposed by the 1st Defendant. The Judge in CFI did not make a ruling at the hearing but decided the issue in his judgment to the effect that he allowed the amendment and found that the Defendant was in contempt of all of the originally pleaded and newly alleged breaches.

The Court of Appeal considered this approach “faulted”. The court stressed that contempt proceedings were of penal nature, and hence require strict proof of guilt beyond reasonable doubt. It also entails that fairness requires the person cited for contempt to be informed at the outset of all allegations made against him. The statement in support of the application was to be treated in a similar fashion as an indictment in criminal proceedings. If the CFI approach was adopted, the Defendant would be deprived of the opportunity to defending against the additional allegations.

The court also held that the elements of contempt were not merely a strict proof of breach – but also involved a question of guilty intention on the part of the Defendant. The court then leniently held that the Defendant’s breach was an “unintentional slip”. Applying such a high threshold, the Court of Appeal held that the Defendant was not in contempt.

Implications

The implications of this case are two-fold. Firstly, despite the undertakings being part of the court order, the purpose of the undertaking (and the language of the undertaking) must be clear and certain enough in order to be enforceable. Secondly, a breach of a Court undertaking does not automatically translate to contempt of Court. The Court will have to be satisfied that the Defendant acted with the guilty intention as well.

The defendant filed an application to stay the action pursuant to section 20 of the Arbitration Ordinance, Cap. 609 based on the ground that there existed a binding arbitration agreement which required the matter to be referred to arbitration.

In the contract between the parties, the dispute resolution clause stated that in the event of disputes, the matter “may” be referred to arbitration. The defendant’s argument was two-fold: 1) The clause constitutes an arbitration agreement as it demonstrates the parties’ clear intention both to arbitrate and for relief to be obtained from arbitration as opposed to litigation. 2) Where the clause gives an option for the parties to elect arbitration and one party does so, then it becomes mandatory for the other party to be bound by this and it cannot insist on carrying on with litigation which has already commenced. The defendant relied on the Privy Council case of Anzen Ltd v Hermes One [2016] UKPC 1. However, the learned judge held that the relevant clauses were “substantially different” from one another.

If the learned judge found that there existed an arbitration agreement in the present case, then the action ought to be stayed.
In deciding whether there was an “arbitration agreement”, the determining factor is whether the parties are compelled to have the dispute resolved by arbitration or whether they are given a choice. The learned judge made 3 observations: 1) The answer is based on the proper construction of the relevant clause by applying established contractual principles. 2) Where permissive words such as “may” or “can” appears in an arbitration provision, some cases have been interpreted so that these words are given their literal meaning such that the parties have a choice. However, there have been cases where the word “may” should really be construed as “shall”, such that the parties are compelled to submit to arbitration. Deputy Judge Winnie Tsui maintained however that the approach of the courts in the construction exercise remains consistent as the conclusions were reached based on the relevant “factual matrix” of each case. 3) Where the parties have agreed on specific provisions providing for a mechanism as to how to arbitrate, an assumption may arise (and can only be displaced by clear words to the contrary) that the parties do not intend to have a choice between litigation and arbitration when a dispute subsequently arises.

It was held that applying the aforementioned principles, the present clause does not compel or require the parties to submit any dispute arising out of the contract to arbitration. The present case was therefore a case where the word “may” should simply mean “may” and it should be given its literal meaning. As the parties are not compelled to arbitrate, the present clause is not an arbitration agreement for the purposes of the Arbitration Ordinance, Cap. 609, such that the plaintiff ought to continue with the present action. The defendant’s stay application was therefore dismissed.

The implication of this case is that parties should be careful when drafting their respective dispute resolution clauses and should ensure that the said clause accurately reflects the actual intention of the parties should any disputes arise between them. This case also reminds parties that even when the word “may” appears in an arbitration provision, it is not clear whether the parties will be compelled to arbitrate or are given a choice to do so as each case will depend on its own “factual matrix”.

The plaintiff, the defendant, another company (of which the defendant was the founder and director of) and other subsidiaries of the company entered into a subscription agreement whereby the company would issue convertible notes to the plaintiff. The defendant also issued a guarantee in favour of the plaintiff. The subscription agreement, the convertible notes and the conditions of the convertible notes all contained arbitration clauses, whereas the said guarantee contained a clause which stated the following: “irrevocably submits to the non-exclusive jurisdiction of the Hong Kong courts”.

The plaintiff commenced legal proceedings under the guarantee, whilst the defendant relied on section 20 of the Ordinance to apply for a stay of the legal proceedings commenced by the plaintiff and for the dispute to be referred to arbitration.

At issue was whether the action is “in the matter which is the subject of an arbitration agreement” as set out under section 20 of the Ordinance. If it did fulfil the requirements under section 20, it would be mandatory for the court to order a stay of the proceedings.

The judge held that no clause in the guarantee clearly excluded or displaced the mandatory arbitration clause contained in the subscription agreement as the dispute resolution method. It was also held that it is arguable that the non-exclusive jurisdiction clause contained in the guarantee can operate in parallel with the arbitration provisions found in the other agreements. The judge held that as the proceeding brought by the plaintiff is “in the matter which is the subject of an arbitration agreement”, a stay of the proceedings was ordered. The plaintiff was also ordered to pay the defendant’s costs of the summons on an indemnity basis.

The implications of the aforementioned case are twofold. Firstly, it reinforces the pro-arbitration stance of the Hong Kong judiciary. Secondly, contracting parties involved in transactions concerning multiple contracts should be mindful of the contractual inconsistencies that may be brought to light in the event of disputes arising, which in turn leads to parties incurring further time and costs. In order to resolve disputes as effectively as possible, parties should therefore think carefully how they wish disputes to be resolved during the drafting stages of multiple contracts.

In Zimmer Sweden AB v KPN Hong Kong Ltd and another (CACV 172/2015), the Court of Appeal affirmed the wider meaning of the “fraud exception” to be applied in applications for summary judgment in Hong Kong.

Fact
The plaintiff alleged that it was a victim in a cyber fraud in which it was deceived to transfer funds to the Lithuanian bank account which were subsequently remitted to bank accounts in Hong Kong of the 1st and 2nd defendants.

The plaintiff in its statement of claim argued that the fund transfer was effected as a result of fraudulent misrepresentation and/or mistake as to the recipient’s identity.

In their defence, the defendants contended that the funds received were due to “normal and ordinary business transaction” so they were “bona fide purchasers and/or have changed their position in good faith”.

In reply, the plaintiff challenged the authenticity of the facts relied on by the defendants in support of their defence.

At Trial
At trial, the trial judge dismissed the plaintiff’s application for summary judgment because the plaintiff’s claim was caught by the fraud exception.

The plaintiff appealed the trial judge’s decision to the Court of Appeal.

Appeal
The Court of Appeal agreed with the trial judge’s finding that the Plaintiff, in its pleadings, in effect raised allegations against the defendants that they were party to a fraud. The appeal was dismissed accordingly.

Implications
This case affirms Hong Kong courts’ wide application of the “fraud exception” in summary judgment applications.

However, in a similar case Universal Capital Bank v Hongkong Heya Co Ltd (HCA 1211/2015), Zimmer Sweden was distinguished and it was held that the fraud exception did not apply to bar the application for summary judgment. In this case, a cyber fraud alleged occurred resulting in financial losses suffered by the plaintiff. The funds were subsequently transferred to a Hong Kong bank account of the defendant and were eventually transferred to a third party in PRC. It was held that the plaintiff’s claim was based on the defendant’s unjust enrichment but not allegation of fraud against the defendant. The plaintiff’s application for summary judgment is not barred and a conditional leave to defend order was granted to the defendant.

Based on our experience in handling cases involving cyber fraud and the above two cases, victims of cyber fraud who would like to obtain summary judgment to claim for restitution are advised to be careful when preparing pleadings so that no allegation of fraud against a defendant is made.

The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 (hereinafter, “the Ordinance”) was published on 2nd June 2016. The purpose of the Ordinance, as per its preamble, is “to amend the Companies (Winding Up and Miscellaneous Provisions) Ordinance and its subsidiary legislation to increase protection of creditors; to streamline the winding up process; to strengthen regulation under the winding up regime; and to make related, consequential and minor technical amendments.” This article will set out some of the main changes found in the Ordinance concerning the protection of creditors and the winding up process.

Creditor protection

The Ordinance aims to enhance the protection of creditors by introducing, inter alia, the following changes:

1) Unfair preferences: The Ordinance enables the court to set aside transactions entered into by a company prior to its winding up where it unfairly puts one creditor in a better position than others.
2) Transactions at an undervalue: The court has the power to set aside transactions at an undervalue entered into by a company within 5 years before the commencement of its winding up, but only where one of two conditions are met: either the company is unable to pay its debt at the time or it becomes unable to pay its debt as a result of the transaction or unfair preference.
3) Floating charges: The relevant time has now been extended such that floating charges made in favour of connected persons two years before the commencement of the company’s winding up will be caught.
4) Members’ and directors’ liabilities: Where a company is being wound up and it has made a payment out of capital relating to the redemption or buy back of any of its shares from a person and winding up commences within one year, both the past shareholder and the director who signed the solvency statement are jointly and severally liable to contribute an amount not exceeding the amount of the payment out of capital made by the company in respect of the shares redeemed or bought back from the past shareholder.

Winding up

The Ordinance also aims to streamline the winding up process by introducing, inter alia, the following changes:

1) Appointment of solicitor: The procedure whereby a liquidator appoints a solicitor to assist in court winding-up has been simplified.
2) Safeguards in voluntary winding up: The directors must deliver to the Registrar a winding up statement. Thereafter, the directors need to “cause a meeting of the company to be summoned for a date not later than 28 days after the delivery of” the said winding up statement. The directors are to appoint a provisional liquidator from the commencement of the winding up of the company.
3) Powers of provisional liquidators: For court winding up, the powers and duties of provisional liquidators are set out more clearly. The remuneration and tenure of the provisional liquidators are also set out more clearly.
4) People disqualified for appointment as provisional liquidator or liquidator: The list of disqualified people has been expanded to avoid conflicts of interest.

Summary

Whilst the operation date of the Ordinance is currently unknown, however, once the Ordinance comes into effect, they are likely to have an impact on the landscape of insolvency and winding up law in Hong Kong.