HCB 4390/2002
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
BANKRUPTCYPROCEEDINGS NO. 4390 OF 2002
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Re: CHOI LAI MING, a Debtor
Ex Parte: THE OFFICIAL RECEIVER
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Before: Hon Barma J in Chambers
Dates of Hearing: 15 and 16 December 2004
Date of Judgment: 21 October 2005
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J U D G M E N T
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Introduction
1. The applications now before me raise questions as to the extent of the Hong Kong Government (“the Government”)’s rights in relation to the recovery by it of a loan advanced to a civil servant under the Government’s Home Financing Scheme (“the Scheme”), by which it provided a form of housing benefit to eligible civil servants, in circumstances where the civil servant has subsequently been made bankrupt.
2. In this case, the civil servant involved is Mr Choi Lai Ming (“Mr Choi”), who is employed as a Senior Waterworks Inspector for the Water Supplies Department. However, with the exception of an application by the Official Receiver, Mr Choi’s trustee in bankruptcy, for an income payments order against Mr Choi, the questions raised by these applications are of wider significance, as they arise in a large number of bankruptcies involving civil servants to whom loans were made under the Scheme.
The parties’ respective positions
3. The Government’s primary contention is that it is a secured creditor of Mr Choi in respect of the loan granted to him under the Scheme holding security, holding security in the form of a charge over Mr Choi’s salary, and that as the holder of such security, it is entitled, notwithstanding Mr Choi’s bankruptcy, to continue to make deductions from his salary in order to effect repayments by him of that loan and interest accruing upon it, until the loan and accrued interest are fully repaid. The Government also contends that it holds similar security over any pension that may be payable by it to Mr Choi.
4. As a fall back position, the Government says that, even if it is not a secured creditor of Mr Choi’s, it is entitled to make deductions from his salary and any other payments that may be due from it to him by way of set off, so as to effect repayments of the loan, until such time as Mr Choi obtains his discharge from bankruptcy.
5. The Official Receiver, as Mr Choi’s trustee in bankruptcy, takes the position that the Government is neither a secured creditor nor entitled to exercise any rights of set off against Mr Choi after he became bankrupt, with the consequence that the Government was not entitled to make the deductions which it continued to make from Mr Choi’s salary after his bankruptcy by way of repayment of the loan under the Scheme. The Official Receiver seeks to recover for Mr Choi’s estate in bankruptcy the deductions which have been so made, and going forward, also applies for an income payments order against Mr Choi under section 43E of the Bankruptcy Ordinance (Cap. 6) (“the Ordinance”) seeking a monthly payment from Mr Choi which is calculated without reference to the deductions which the Government claims to be entitled to make. The Official Receiver also contends, as a preliminary matter, that the Government is not in fact a creditor of Mr Choi at all, and so has no locus standi to apply for the relief which it seeks.
6. At the hearing before me, the Government was represented by Mr John Griffiths S.C. and the Official Receiver by Ms Linda Chan. Mr Choi appeared in person, but restricted his submissions to the income payments order, in relation to which he submitted that if such an order were to be made at all, it should be in a lesser sum than that sought by the Official Receiver, to take account (in particular) of what Mr Choi said were his obligations to support his wife, from whom he was separated, and to support his elderly mother.
The applications under consideration
7. The applications before me consisted of an amended Summons issued by the Government in the bankruptcy, pursuant to section 97 of the Ordinance, issued on 4 May 2004 and amended on 13 September 2004, and the applications made by the Official Receiver under his report dated 20 July 2004 and under his Notice of Application for an Income Payments Order dated 30 September 2004.
8. By the amended Summons, the Government seeks:-
(1) a declaration that it is a secured creditor of Mr Choi and has security rights over any salary, pension and any sums of money whatsoever due from the Government to Mr Choi or his estate in the event of his death; or alternatively
(2) a declaration that, Mr Choi being indebted to it, the Government is entitled, so long as Mr Choi has not been discharged from bankruptcy, to deduct by way of set off such sums as it may in its discretion determine from any amounts due to Mr Choi (or to his estate in the event of his death) from the Government, by way or salary or otherwise.
9. By his report dated 20 July 2004, the Official Receiver seeks:-
(1) an order that the Goverment should pay to the Official Receiver all sums deducted from Mr Choi’s salary from 1 June 2002 onwards; and
(2) a declaration that the Government is not entitled to make deductions from Mr Choi’s monthly salary for the purpose of repaying the loan made by the Government to Mr Choi under the Scheme, or for the purpose of repaying any other sums that might be due from Mr Choi to the Government or the Financial Secretary Incorporated (“the FSI”).
10. By the Notice of Application dated 30 September 2004, the Official Receiver seeks:-
(1) an income payments order requiring the Government to pay to the Official Receiver for the benefit of Mr Choi’s creditors a sum of HK$11,713 per month out of the salary payable by it to Mr Choi; and
(2) an order in similar terms to the first order sought under the report of 20 July 2004.
The factual background
11. The factual background to the various applications now before me is set out in the affirmations of Lo Wai Man, a Senior Accounting Officer with the Treasury, and in the reports of the Official Receiver. This background can be summarised as follows.
12. So far as the Scheme is concerned, it is a form of housing benefit offered by the Government to eligible civil servants to enable them to purchase property for their residential accommodation. One form of benefit offered under the Scheme is a downpayment loan, usually limited to 30% of the cost of the property being purchased or 2 years’ salary of the borrower. Where a borrower has joined the Government’s New Pension Scheme, and has completed 10 years’ pensionable service, he may borrow up to the amount of his earned maximum commuted pension gratuity at the time of application for the loan.
13. It is well known that banks in Hong Kong are, in general, prepared to finance up to 70% of the cost of residential properties by way of mortgage. Thus, the downpayment loans under the Scheme provide a means by which civil servants are enabled to borrow up to the whole of the downpayment which they would otherwise have to fund from their own savings or other resources, and thus to own residential accommodation which they might otherwise find difficult to acquire.
14. Such loans are repayable by equal monthly instalments of principal and interest over a period of 10 years (or a shorter period up to the civil servant’s retirement age, if earlier). Where a civil servant applies for such a loan within 10 years before his retirement, he may elect to make monthly repayments of interest only, repaying the principal amount of the loan from his commuted pension gratuity.
15. These terms, and terms setting out the mechanisms by which repayments are to be effected, are embodied in a number of documents executed by the civil servant in the process of applying for and obtaining the loan, and in applicable Civil Service Regulations (“CSRs”) which form part of the loan terms (being incorporated by reference), and which are also part of the terms of employment of the civil servant. I shall refer to the relevant provisions in these documents and the CSRs below.
16. Mr Choi joined the civil service on 22 September 1980, and attained his current grade on 3 August 1982. His terms of employment provide that he agrees to be bound by all Government Regulations, including CSRs.
17. Mr Choi first joined the Scheme on 3 January 1997, and was granted a downpayment loan for the purchase of a property at 8 Honiton Road, Hong Kong. He borrowed some 70% of the cost of the property from a commercial bank, which obtained a first legal charge over the property. The property was also subject to a second legal charge in favour of the FSI as security for the downpayment loan.
18. In 1999, Mr Choi decided to purchase a different property, at Flat F, 11th floor, Block 6, Tung Chung Crescent, Tung Chung, Lantau. On 20 July 1999, he made an Initial Application for change of property. On 21 July 1999, he completed a Formal Application for a downpayment loan in respect of the new property in the amount of HK$776,400, this being 30% of the purchase price of HK$2,588,000. On 27 July 1999, he was informed by the Director of Accounting Services (“the DAS”) that the proposed change of property had been approved in principle under CSRs 1600-1799 governing the Scheme.
The relevant documents and their terms
19. The Formal Application was addressed to the DAS. Clauses 4 and 5 of the Formal Application provided, so far as material, as follows:-
“4. ... I agree that DAS shall have the right to recover any loans from my salary or any monies due for whatever reason to me or to my estate from the Government.
5. I agree to abide by the provisions of the [Scheme] set out in [CSRs] 1600-1799 and any subsequent amendments thereof. I undertake to execute a legal charge against the property in...
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