Lo Kwok Kuen Danway v Secretary for Justice

Court of Appeal
Civil Appeal No. 180 of 2016
Cheung, Yuen, Kwan JJA
25 April 2017

Employees’ benefits – civil servant – whether Government entitled to deduct from pension benefits of civil servant in settlement of debt upon discharge from bankruptcy

In February 1999, B, a police officer, was compulsorily retired following disciplinary proceedings with pension benefits deferred until he had attained the age of 55 in February 2012. B’s application for judicial review of the decision was dismissed with costs. In November 2004, the Secretary for Justice served a statutory demand on B demanding immediate payment of the costs debt. In December 2005, B was adjudged bankrupt. In December 2009, B was discharged from bankruptcy and the debt remained unpaid. In February 2012 and shortly before B turned 55, the Government Treasury informed B that it would make a 25 percent deduction from the pension benefits payable to him in settlement of the outstanding debt. B objected and contended that he was entitled to be paid his pension benefits in full without deductions by reason of the Certificate of Discharge. The Deputy Judge dismissed B’s claim for declaratory relief and B appealed. The Government argued that: (a) it was a secured creditor of the debts owing to it by B by way of an equitable charge created under s. 31(2) of the Pension Benefits Ordinance (Cap. 99) (the “PBO”) on the pension benefits and was entitled to enforce the security by way of deduction; (b) there was no surrender or waiver of this security; (c) in any event, s. 31(2) of the PBO overrode s. 32(2) of the Bankruptcy Ordinance (Cap. 6) (the “BO”) which released a debtor from all his bankruptcy debts upon the discharge of the bankruptcy order. Section 28(1) of the PBO provides that “If any person to whom a pension has been granted is adjudicated bankrupt … subject to sub-s. (5), payment of the pension shall cease as from the date on which he is so adjudicated.” Section 28(5) provides for the restoration of the payment of the pension upon the discharge of the bankruptcy order. Insofar as material, s. 31 provides that “(1) … pension benefits granted to an officer shall not be assignable or transferable except for the purpose of – (a) satisfying … a debt due to the Government; … and pension benefits shall not be liable to be attached, sequestered or levied upon for or in respect of any claim or debt other than a debt due to the Government. (2)(a) Where any person to whom pension benefits are granted owes a debt to the Government, … the Director of Accounting Services may apply those benefits … for the satisfaction … of the debt.”

Held, allowing the appeal, that:

  • The Government did not hold any security in the pension benefits and was therefore not a secured creditor. An equitable charge was only created where there was an appropriation of a particular fund by the debtor for the discharge of his debt in favour of the creditor so that the creditor might have a proprietary interest in the segregated fund. Section 31(2) of the PBO, whether by itself, or read together with s. 28 and s. 31(1), did not enable one to detect the intention to impose a charge on the pension benefits. Section 31(1) was a general provision which applied to all civil servants irrespective of whether they owed any debts to the Government. The Government was merely asserting in s. 31(2)(a) a countervailing claim in respect of the civil servant’s liability for the debts which operated in extinction of so much of the Government’s liability for the payment of pension benefits towards the civil servant. The provision for deduction was simply to impose a limit on the deduction depending on whether the deduction was consensual or not. There was no segregation of a specific fund in the first place which might have the effect of creating a security in favour of the Government.
  • (Obiter) The rule on surrender of security applied only to a security which, if given up, would augment the estate against which the creditor sought to prove. As s. 28 of the PBO prevented the vesting of B’s pension in the trustee in bankruptcy, no question of the Government’s surrender of its security in the pension benefits to the trustee for the general benefit of the creditors could arise. The same argument applied to the question on waiver.
  • There was nothing in the BO or the PBO which showed that, notwithstanding the clear wording of the provision on release of all the debtors’ debts upon discharge, debts owing to the Government were given special treatment so that they survived after the discharge of bankruptcy.

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