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Hong Kong – A Bankruptcy Or Winding Up Petition Is Considered An ”Action” And Subject To The Limitation Ordinance.

5 December, 2013

 

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

 

On 30 August 2013, the Court of Appeal handed down an important judgment in Re Li Man Hoo which confirms that bankruptcy and winding up petitions fall within the definition of an “action” under section 4(4) of the Limitation Ordinance (the “Ordinance“). As a result, any bankruptcy or winding up petition based on judgment debts that are more than 12 years old will be statutorily time-barred. The judgment is welcome judicial clarification in light of previously conflicting case law existing both in England and Hong Kong.

 

The Relevant Provisions

 

Section 4(4) of the Ordinance provides that “An action shall not be brought upon any judgment after the expiration of 12 years from the date on which the judgment became enforceable, and no arrears of interest in respect of any judgment debt shall be recovered after the expiration of 6 years from the date on which the interest became due.”

 

Section 2 of the Ordinance defines “action” as “includes any proceedings in a court of law.”

 

Previously Conflicting Decisions

 

The English Court of Appeal, considering the equivalent sections of the English limitation legislation, in which the wording is materially identical to the provisions in Hong Kong, established in the case of W.T. Lamb & Sons v Rider [1948] 2 KB 331 that “action” has a restricted meaning and refers only to an “action upon a judgment” – a new set of proceedings brought for the purpose of re-establishing the judgment debt. Such a meaning excludes bankruptcy or winding up proceedings, as a bankruptcy or winding up petition is not an action on a judgment in the strict sense.

 

This decision was not free from controversy, as subsequent English decisions remarked upon the inconsistency. In Lowsley v Forbes [1999] HC 329, the English House of Lords acknowledged that the decision inW.T. Lamb was erroneous. However, since there was clear evidence that when enacting the revisions to the English limitation provisions the UK Parliament had proceeded on the understanding that W.T. Lamb was correct, the House of Lords held that it must have been Parliament’s intention at that time to give the word “action” the restricted meaning as in W.T. Lamb, rather than the wider meaning which would include bankruptcy or winding up proceedings, and the House of Lords had to give effect to the restricted meaning.


In the first instance decision of Re Li Man Hoo [2012] 2 HKLRD 743 the court followed the English authorities and held that section 4(4) of the Ordinance does not bar presentation of a bankruptcy or winding up petition, as the case may be. However, two further decisions of the Hong Kong Court of First Instance, Re Man Po International Holdings Limited [2012] 5 HKC 539, a decision of Harris J, in front of whom Li Man Hoo was not cited, and Re Lau Wan [2013] 3 HKLRD 567 a decision of Anthony Chan J, both held that there was nothing to suggest that the legislature in Hong Kong had a particular meaning of “action” in mind at the time the Ordinance was introduced. In the absence of any established authorities to the contrary, the correct approach in Hong Kong was to give section 4(4) the construction found by the House of Lords in the Lowsley case, and there was no reason why Hong Kong should read into its law a construction which was wrong and against the plain reading of section 4(4).

 

The Decision Of The Court Of Appeal

 

In an appeal brought in the Li Man Hoo proceedings, the Court of Appeal overturned the first instance decision and held that “action” shall be given a wider meaning so as to catch bankruptcy or winding up proceedings based on judgment debts that are more than 12 years old. The Court of Appeal held that, as a matter of ordinary language, a bankruptcy or winding up petition is clearly a “proceeding in a court of law” pursuant to section 2 of the Ordinance, and insofar as the debt on which it is founded is a judgment debt, it would appear to be a proceeding that is “brought upon” the judgment under which the judgment debt arose.

 

The Court of Appeal did acknowledge that it should not only consider the literal meaning of the provisions but also the preceding case law. When considering the abovementioned English cases, the Court of Appeal was of the view that the English courts have come to reach their current position by tracing the legislative history of the limitation provisions in England. The Court of Appeal, following Harris J and Anthony Chan J’s reasoning, held that the Hong Kong courts need not be burdened by the legislative history of the English law and should interpret the Ordinance in whatever way was the correct interpretation of such legislation.

 

The Court of Appeal also clarified a point concerning the recovery of interest on a judgment debt. It was held that the effect of the second part of section 4(4) of the Ordinance is to bar the recovery of interest on a judgment debt more than six years after it becomes due. As interest accrues from day to day, the effect of the provision is that only interest accruing due within six years of the date of commencement of proceedings can be claimed.

 

The judgment gives much needed certainty to the Hong Kong law of limitation of actions: bankruptcy or winding up petitions (as the case may be) cannot be used to “enforce” a judgment more than 12 years after it is delivered.

 

Deacons

 

For further information, please contact:

 

Richard Hudson, Partner, Deacons 

richard.hudson@deacons.com.hk

 

Benjamin Ng, Deacons

benjamin.ng@deacons.com.hk

 

Deacons Dispute Resolution Practice Profile in Hong Kong

 

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