19 Nov 2014

Application of the Partition Ordinance in bankruptcy cases

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The Partition Ordinance

The primary intention of the Partition Ordinance (Cap 352) is to enable an unwilling co-owner to rid himself of the shackles of the co-ownership and to have either a physical division of the property among the co-owners or a division of the proceeds of its sale1. The Partition Ordinance is applicable to both family-owned properties and properties co-owned by unrelated parties.The Court may either (1) make an order for partition of the property, (2) make an order for sale or (3) refuse to make any order2. The applicable principles are that3:
(a) A co-owner has a basic right to rid himself of the shackles of co-ownership and, if he has no other remedy, ask for an order for partition or sale;
(b) When it is impracticable to make an order for partition, the Court will make an order for sale unless it is persuaded (the burden being on the opposing co-owner(s)) that such an order will not be beneficial to all the co-owners or that it will result in very great hardship to one co-owner; and
(c) Whether an order for sale is beneficial to all the co-owners is not determined by the dissent of the opposing co-owners or the assertion by them that it is not beneficial. It has to be determined by the Court objectively.

 

Application to bankruptcy cases

Upon the making of a bankruptcy order and the appointment of a trustee in bankruptcy, a bankrupt’s interest in a property becomes vested in the trustee4. A joint tenancy is severed by operation of law if one of the joint tenants is adjudicated bankrupt and the co-ownership is converted into a tenancy in common5.

The discharge of a bankrupt from bankruptcy does not have the effect of re-vesting in the bankrupt property duly vested in the trustee in bankruptcy, and the trustee is still bound to realise assets and to distribute the proceeds amongst creditors.

The interest of creditors will prevail over the interest of co-owners unless in exceptional circumstances. As an example of how the Court weighs the interest of co-owners as against that of creditors, it was held by majority in an English Court of Appeal decisionthat:

“… it is not uncommon for a wife with young children to be faced with eviction in circumstances where the realisation of her beneficial interest will no produce enough to buy a comparable home in the same neighbourhood, or indeed elsewhere; and if she has to move elsewhere, there may be problems over schooling and so forth. Such circumstances, while engendering a natural sympathy in all who hear of them, cannot be described as exceptional. They are the melancholy consequences of debt and improvidence with which every civilised society has been familiar…”

Recently, there has been an increasing use of the Partition Ordinance in a bankruptcy context. Below are four recent bankruptcy cases which demonstrate the Court’s application of the above principles. In each of the four cases, the application was made after the bankrupt was discharged.

Re Leung Wang Fai (HCB 15328 of 2003)

The property was purchased before the bankruptcy in the joint names of the bankrupt and his mother. The mother opposed the application for sale on the grounds that (1) the bankrupt was only a trustee holding his half share for her; and (2) an order for sale would cause great hardship to her and her husband.

The Court found that the bankrupt and the mother were joint owners of the property, but declined the order for sale after balancing the interests of the trustees and the mother:

(1)

Both the mother and the father did not have any income or other property;

(2) The Court doubted whether the mother (aged 82) would be able to purchase reasonable accommodation for herself and her ailing husband (aged 85) with the money which the mother was expected to receive from the sale of the property;
(3) The Court considered that the proceeds would not be sufficient to pay for the rental required for the couple’s future accommodation going forward;
(4) Moving the couple into a home for the aged was in the Court’s view a harsh alternative; and
(5) The trustee did not apply for sale for 9 years (from the making of the bankruptcy order to the application for sale).

 

Re Lau Yuet Ming Daisy (HCB 10078 of 2003)

Prior to her being adjudicated bankrupt, the bankrupt and her husband were the registered owners of a property in Tuen Mun as joint tenants.

The application for an order for sale was opposed by the husband who alleged that the discharged bankrupt held 50% of the property on trust. There were no documentary records showing that the discharged bankrupt was a mere trustee of the property, and the Court found that his case was contrary to the evidence given in various affirmations.

The discharged bankrupt (aged 48 years old) and her husband (aged 55 years old) were the only occupants of the property. They worked as security officers, contributed to their parents’ maintenance and had no other dependents. The Court was not satisfied that there was great hardship to justify a refusal of an order for sale.

Re Ng Tze Ching (HCB 5883 of 2006)

The property was a residential unit in Tin Shui Wai built under the Home Ownership Scheme, and was held by the bankrupt and his wife as joint tenants.

The wife contested the application for an order for sale, but did not dispute the trustees’ interest in the property. It was her case that she did not have the financial means to buy out the trustee’s interest. The property was the only significant asset of the wife. She contended that the proceeds to be received from the sale would not allow her to buy or rent a comparable property.

The discharged bankrupt (aged 65) was a taxi driver but did not have a substantial or stable income. The wife (aged 56) had a part-time job as a tour guide. She had kidney problems and suffered from hypertension. But her evidence did not satisfactorily give the details of her health issues. The couple had two sons. The eldest was married and had moved out of the property. The younger son resided in the property and worked on a casual basis with no stable income. The Court was not satisfied that the circumstances justified a finding of very great hardship, and accordingly granted an order for sale.

Re So Ming Wai (HCB 175 of 2004)

The property was held by two brothers as tenants in common and was mortgaged to a bank. According to the trustee’s calculations, if the property was sold at its market value, there would be surplus proceeds (after paying off the outstanding mortgage loan) available to be shared between the trustee and the brother of the discharged bankrupt.

The trustee asked towards the end of 2012 whether the brothers would acquire the trustees’ interest or sell them the remaining interest. Prior to the substantive hearing, the Court adjourned the matter for two months to allow the brothers to negotiate with the trustee about the sale. During the adjournment period, the bank obtained leave of the Court to proceed with a mortgagee action.

The brothers sought further time to liaise with solicitors to seek a valuation of the property with a view to purchasing the trustee’s share. The Court said no on the basis that both it and the trustee had already granted generous indulgence to the brothers in considering the sale.

After considering the cases of Re Citro and Re Ng Tze Ching, the Court held that these principles were also applicable to the bankrupt and “innocent” family members. The Court agreed that there was no evidence of any hardship to outweigh creditors’ interests, and accordingly ordered a sale.

Conclusion

There has been an increasing use of the Partition Ordinance in recent bankruptcy cases by trustees to realise assets. It is not difficult to understand that parties under such co-ownerships may argue that the bankrupt’s share in the property is subject to a trust under which the bankrupt was never intended to have a beneficial ownership. However, in such circumstances there must be clear documentary evidence of the existence of such a trust. The Court will take into account all relevant factors, but importantly the interest of creditors will prevail over that of the co-owners. Only when the circumstances justify a finding of a grave hardship to a co-owner will the Court refuse an order for sale.

1 Pun Jong Sau & Ors v Poon Wing Kong & Ors[1977-1979] HKC 210 per Trainor J
2 Section 2 of the Partition Ordinance (Cap 352)
3 Wong Chun Kei v Pun Fai Ching(2007) 1 HKLRD 825
4 Sections 58 (1) and (2) of the Bankruptcy Ordinance (Cap 6)
5 Re Chow Yuet Lam (a bankrupt)[2000] 1 HKC 404
6 Re Citro (a bankrupt)[1990] 3 All ER 952
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