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Legal Update

Recent Case Considers Impact of Bankruptcy on Retirement Scheme Benefits

24 October 2008
Mayer Brown JSM Legal Update
A recent case in the High Court has considered the complex issues concerning the impact of bankruptcy on retirement scheme benefits. In particular, the judge considered whether the trustee in bankruptcy could claim that part of the bankrupt employee's retirement benefits earned due to service following the employee's discharge from bankruptcy.

Full Update
In July this year, Madam Justice Kwan handed down a decision in the case of Re Ng Shui Fun. Mr. Ng was a school teacher, and subsequently a librarian, working in a subvented school. He was entitled to be a member of a retirement scheme established by statute.
Mr. Ng went into voluntary bankruptcy on 3 December 1998. At that time his accrued retirement benefits were worth about HK$1.3 million. He was automatically discharged from bankruptcy four years later, at which time his retirement benefits were worth nearly HK$2 million. Mr. Ng eventually ceased employment and retired (triggering payment of his retirement benefits) in August 2005, at which time his accrued benefits were worth HK$2.5 million.
The key questions to be considered by the judge were :
  • whether a restriction on the transfer of retirement benefits contained in the Education Ordinance operates to prohibit the trustee in bankruptcy from claiming Mr. Ng's accrued benefits under the retirement scheme, and
  • if not, then what part of the retirement benefits transfers to the trustee in bankruptcy. 
The judge dealt with the first question by means of giving the relevant statutory provision its ordinary meaning, thereby permitting the transfer of Mr. Ng's rights to benefits under the retirement scheme to the trustee in bankruptcy.
The more interesting point is whether the trustee in bankruptcy was entitled to :
  • the benefits accrued at the date of bankruptcy (i.e. HK$1.3 million), or
  • the benefits up to the date of discharge of the bankruptcy (HK$2 million), or
  • the full amount of benefits (HK$2.5 million).
The judge considered the relevant cases from the UK in some detail. The leading case in this area is Patel v. Jones. In that case the judge decided that the mere fact of bankruptcy does not change the nature of the rights of an employee under a retirement scheme. As those "rights" amount to "property" under the bankruptcy legislation, they vest in full in the trustee in bankruptcy. Therefore the trustee in bankruptcy has a right to all of the benefits to which the bankrupt employee would have become entitled had he not been bankrupt.
Kwan J therefore concluded that the trustee in bankruptcy in Mr. Ng's case was entitled to the entirety of the benefit to which Mr. Ng would have become entitled upon his retirement (i.e. HK$2.5 million). This included not just the benefit accrued before bankruptcy and that accrued during bankruptcy, but also (and perhaps surprisingly) the benefit accrued after Mr. Ng's discharge from bankruptcy.
This decision may cause some consternation amongst retirement scheme administrators and trustees. However, in reality, the facts of this particular case will not be replicated often. Most retirement schemes in Hong Kong contain an express provision setting out that on bankruptcy accrued retirement scheme benefits are forfeited to the trustees. In addition many provide that the bankrupt employee shall cease to be a member of the scheme. 
To the extent that a retirement scheme contains properly drafted forfeiture clauses no amount will fall into the hands of the trustee in bankruptcy.
Finally, we understand that Mr. Ng has been granted leave to appeal to the Court of Appeal, so watch this space!
For further information, please contact:
Duncan Abate, Partner

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