LO KWOK KUEN DANWAY v. SECRETARY FOR JUSTICE for and on behalf of THE GOVERNMENT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION

CACV 180/2016 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 180 OF 2016 (ON APPEAL FROM DCCJ NO. 2792 OF 2013) BETWEEN LO KWOK KUEN DANWAY Plaintiff and SECRETARY FOR JUSTICE for and on behalf of THE GOVERNMENT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION Defendant Before: Hon Cheung, Yuen and Kwan JJA in Court Date of Hearing : 23 February 2017 Date of Judgment : 25 April 2017 J U D G M E N T Hon Cheung JA : I. The appeal The issue in this appeal is ‘Can the Government (the defendant in the present case) deduct from the pension benefits of a civil servant (the plaintiff in the present case) debts owing to it by the civil servant who was made a bankrupt but has since been discharged from bankruptcy’? Deputy District Judge Maurice Chan’s answer to the question was ‘yes’. The plaintiff now appeals. II. Facts 1 I will respectfully adopt the summary of facts by the Judge below : The plaintiff was a police officer who, in about 1998, was subject to disciplinary proceedings as a result of which the Commissioner of Police (‘the Commissioner’) imposed upon him a penalty on 3 February 1999, whereby he was compulsorily retired on 11 February 1999 with deferred pension benefits. Due to the penalty, his entitlement to his accrued pension rights governed by the Pension Benefits Ordinance (‘PBO’) (Cap. 99) was deferred to 19 February 2012, when he would attain the age of 55. However, soon after the penalty, the plaintiff applied for a judicial review of the Commissioner’s decision in HCAL No. 49 of 1999. On 30 September 1999, his application was dismissed by the High Court with costs, later certified by an allocatur dated 12 July 2002 at $328,360. By 3 November 2004, he became indebted to the Commissioner for $493,586.71 consisting of, among other things, the taxed costs, the garnishee costs, and the interest thereon. On 4 November 2004, the Secretary for Justice, acting for the Commissioner, served upon the plaintiff a statutory demand under section 6A(1)(a) of Bankruptcy Ordinance (‘BO’) (Cap. 6) demanding immediate payment of the debt. By 7 September 2005, due to the plaintiff’s continuing indebtedness, bankruptcy proceedings under HCB No. 6923 of 2005 were instituted against the plaintiff, and a bankruptcy order was subsequently made against him on 14 December 2005. By the time the proof of debt was submitted on 7 February 2006 by the Secretary for Justice (who turned out to be the only creditor), the outstanding debt had increased to around $525,473.42, due mainly to interest on the taxed costs being calculated up to the grant of the bankruptcy order. By 14 December 2009, which was four years after the making of the bankruptcy order on 14 December 2005, the debt still remained unpaid. On 4 October 2010, a Certificate of Discharge was granted, discharging the plaintiff from bankruptcy under section 30A of the BO. The plaintiff’s contention is that by reason of the discharge, and by virtue of section 32 thereof, he has since 14 December 2009, been released from all bankruptcy debts, including the then proven debt of $524,473. However, on about 17 February 2012, just before the plaintiff had attained the age of 55 on 19 February 2012, the Government’s Treasury informed him that it would be entitled to make a 25% deduction from the pension benefits payable to him in settlement of the then outstanding debt of $520,837.87. The plaintiff objected, saying that by reason of the Certificate of Discharge, he was entitled to be paid his pension benefits in full without deductions, consisting of pension gratuity payable on 19 February 2012 in the lump sum of $960,108.63, and thereafter, monthly pensions at the rate of $5,714.93 per month. In the events which followed, the Treasury nevertheless deducted $240,027.15 from the lump sum pension of $960,108.63, being 25% thereof, and since then, has been deducting $1,428.73 every month from the monthly pension of $5,714.93, being 25% of the monthly pension. The plaintiff sought, amongst other things,‌ declaratory relief that he was released from all his bankruptcy debts upon his discharge from bankruptcy and the defendant is not entitled to deduct his debt from his pension benefits. III. Statutory schemes 1) Bankruptcy Ordinance 1 For the purpose of this appeal, it is sufficient to point out that, subject to further orders by the Court, a bankruptcy order will be automatically discharged four years after the making of the order. Section 32 of BO is important in that section 32(2)‌ provides that where a bankrupt is discharged from bankruptcy,‌ the discharge releases him from all the bankruptcy debts. This is, however, subject to section 32(3) which provides that the discharge does not affect the right of any secured creditor of the bankrupt to enforce the security for the payment of a debt from which the bankrupt is released. 2) Pension Benefits Ordinance Section 28(1) of the PBO provides that if any person to whom a pension has been granted is adjudicated bankrupt,‌ then subject to sub-section (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 : ‘ (5) Where, by virtue of subsection (1) or (2),‌ payment to a person of a pension granted to him is not being made and the person obtains his discharge from bankruptcy or insolvency, as the case may be, payment of the pension shall be restored to him as from the date on which he is so discharged.’ Section 31(1) imposes a restriction on the assignment of the pension benefits except, among other things,‌ for the purpose of satisfying a debt due to the Government. It allows the Government to apply the pension benefits for the satisfaction of the debts owing by the civil servant to the Government. The amount to be deducted is limited to 25% of the pension benefits if the civil servant who owes a debt does not consent to the deduction : ‘ 31. (1) Save as otherwise provided by the Public Officers (Assignment of Employments) Ordinance (Cap. 363), pension benefits granted to an officer shall not be assignable or transferable except for the purpose of— (a) satisfying (either in whole or in part) a debt due to the Government; or (b) satisfying an order of any court for the payment of money towards the maintenance of the spouse or former spouse or minor child of the officer, 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, subject to paragraph (b), the Director of Accounting Services may apply those benefits, either in whole or in part, for the satisfaction, or partial satisfaction,‌ of the debt. (b) Where— (i) a person owes a debt to the Government arising otherwise than on account of tax payable under the Inland Revenue Ordinance (Cap. 112); and (ii) the person has not consented to the exercise, in relation to pension benefits granted to him, of the power conferred on the Director of Accounting Services by this subsection, the amount applied in such exercise shall not, as regards a particular such benefit, exceed an amount equal to 25% of the benefit.’ 3) Public Officers (Assignment of Emoluments) Ordinance Section 3 of the Public Officers (Assignment of Emoluments) Ordinance (‘PO(AE)O’), Cap. 363 restricts the assignment by a civil servant of his emoluments (which includes pension) without the consent of the Government : ‘ 3. Assignability of emoluments (1) A public officer may with the written permission of an authorized officer assign such proportion or part of his emoluments for such period as the authorized officer may approve. (2) Where an assignment is made under subsection (1), it shall, subject to section 6, be irrevocable during the period approved by an authorized officer under that subsection. (3) Upon the making by a public officer of an assignment under subsection (1), the Government may,‌ until that assignment is revoked in accordance with this Ordinance, deduct from the emoluments due to the public officer the amount assigned and remit it to the assignee.’ Section 5 limits the deduction of payment made in pursuance of such an assignment to not more than 25% or a maximum of 50% of the civil servant’s pension payable at the time of the making of the assignment : ‘ 5. Assignment not to reduce emoluments below certain level (1) Subject to subsection (2), except with the written approval of an authorized officer, no deduction or payment shall be made in pursuance of an assignment under section 3(1) which has the effect of reducing the amount a public officer receives in any month to below 75% of the officer’s emoluments payable at the time of the making of the assignment: Provided that in no case shall any such deduction or payment have the effect of reducing the amount a public officer receives in any month to below 50% of such emoluments. (2) In calculating the amount to be deducted under subsection (1) there shall be disregarded any other deductions made by the Government from the officer’s emoluments.’ Section 6 provides that the assignment shall be revoked by the making against the civil servant of a bankruptcy order : ‘ 6. Revocation of Assignments (1) Notwithstanding section 3(2), an assignment made by a public officer under section 3(1) shall be revoked— (a) by the death of the officer; (b) by the expiration of the period of the assignment approved by an authorized officer under section 3(1) or the repayment of the loan to which the assignment relates, whichever is the sooner; (c) by the making against the officer of an order under the Bankruptcy Ordinance (Cap. 6) adjudging him bankrupt.’ Section 8 provides that the assignment is not to prejudice, among other things, the right of the Government to recover any money or debt due to it, whether by deduction from the public officer’s emoluments or otherwise : ‘ 8. Assignment not to prejudice tax and debts due to Government Nothing in this Ordinance nor any assignment under this Ordinance shall prejudice any right or process of recovery of tax by the Commissioner of Inland Revenue, nor any right of the Government to recover any moneys or debt due to it, whether by deduction from a public officer’s emoluments or otherwise.’ IV. The parties’ case 1) The plaintiff’s case 1 The plaintiff’s case is a simple one. He claims as a result of his discharge from bankruptcy on 14 December 2009, the debts he owed to the Government were discharged. 2) The defendant’s case The defendant’s case is that (1) it is a secured creditor of the debts owing to it by the plaintiff. It is entitled to enforce the security in the pension benefits by way of deduction. (2) There is no surrender or waiver by the defendant of this security. (3) In any event, section 31(2) of the PBO overrides the provision of section 32(2) of the BO which releases a debtor from all his bankruptcy debts upon the discharge of the bankruptcy order. V. The decision The Judge found in favour of the defendant on all three points. The plaintiff challenges each of these three decisions. VI. Is the defendant a secured creditor? 1) The dispute 1 The dispute between the parties is whether section 31(2) of the PBO creates a security in favour of the Government by way of a charge on the pension benefits in respect of the debts owing by the plaintiff. Mr Koo for the plaintiff argued that the provisions are merely in the nature of a set-off which enables the Government to deduct the plaintiff’s debts from his pension.‌ Ms Ismail S.C. (together with Mr Suen) for the defendant argued in favour of the existence of a charge. 2) Nature of an equitable charge It is not disputed that if the charge exists, it is in the nature of an equitable charge, the nature of which is succinctly summarised by the Court of Appeal per Buckley LJ in Swiss Bank Corporation v. Lloyds Bank Ltd & Ors [1982]‌ A.C. 584 at page 594 to 596 : ‘ An equitable charge may, it is said, take the form either of an equitable mortgage or of an equitable charge not by way of mortgage ..... An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation, and confers on the chargee a right of realisation by judicial process, that is to say, by the appointment of a receiver or an order for sale: see Fisher and Lightwood, p. 14. .... R.13 R.13 It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred. If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn,‌ in the absence of any contra indication, that the parties’‌ intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor: compare In re Nanwa Gold Mines Ltd. [1955] 1 W.L.R. 1080 and contrast Moseley v. Cressey’s Co. (1865) L.R. 1 Eq. 405 where there was no obligation to segregate the deposits.‌ But notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the relevant documents in the light of any admissible evidence as to surrounding circumstances the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over property of the other, the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequence of their acts. …. A binding obligation that a particular fund shall be applied in a particular manner may found no more than an injunction to restrain its application in another way, but if the obligation be to pay out of the fund a debt due by one party to the transaction to the other, the fund belonging to or being due to the debtor, this amounts to an equitable assignment pro tanto of the fund: see Rodick v. Gandell (1852) 1 De G.M. & G. 763, 777 and Palmer v. Carey [1926] A.C. 703, 706-707: “This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a court of equity will decree specific performance.” ’ (emphasis added) In Swiss Bank, the Court held that a covenant by a borrower in a loan agreement to observe all exchange control requirements, one of which was that the proceeds of the borrower’s securities were to be applied in discharge of the loan,‌ did not create a security interest, since the loan agreement did not itself require the loan to be paid out of the proceeds, and the requirement was simply a stipulation by the Bank of England when granting exchange control consent. On appeal to the House of Lords Lord Wilberforce reaffirmed this principle at 613 : ‘ I do not doubt the correctness of the principles of law upon which these appellants, S.B.C., rely and which were stated by the learned judge. These are best summed up in the well-known passage from the judgment of the Privy Council in Palmer v. Carey [1926] A.C. 703, 706-707, delivered by Lord Wrenbury: “The law as to equitable assignment, as stated by Lord Truro in Rodick v Gandell (1852) 1 De G.M. & G. 763 , 777, 778, is this: ‘The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words,‌ will operate as an equitable assignment of the debts or fund to which the order refers.’ An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more,‌ such a stipulation will not amount to an equitable assignment. It is necessary to find,‌ further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund. ..... ’ 3) Other cases Ms Ismail referred to a number of cases on the existence of a charge or the lack of it where a party is given a right of set-off from the other party’s fund. In ElectroMagnetic (S) Ltd v Development Bank of Singapore [1994] 1 SLR 734, the Singapore Court of Appeal addressed the issue whether the right of set-off for a bank at common law under the terms of the banking facilities and the term loans with a customer amounts to the security. It referred to Goode on Legal Problems of Credit and Security (2nd Ed, 1988) on the nature of the contractual setoff : ‘ 11 The crux of the issue here is whether the respondents’ right of set-off is a security within the meaning of these statutory provisions. The term “security” has not been defined in the Act; it should therefore bear the natural and ordinary meaning. A security over a property consists of some real or proprietary interest, legal or equitable, in the property as distinguished from a personal right or claim thereon. A right of set-off is a personal right; it is a right given by contract or by law to set one claim against the other and arrive at a balance. In this case,‌ the respondents, being a bank, have a right under their contracts with the appellants to set off the credit balance of the appellants in one account against their debit balance in the other or to combine the two and net the balance. Aside from this right, the respondents have no interest or claim on the balance standing to the account of the appellants.‌ Professor RM Goode in his book Legal Problems of Credit and Security (2nd Ed, 1988) p 4 has this to say on the nature of a contractual right of set-off: A deposits money with B Bank under an agreement which empowers B Bank to set off against its deposit liability any claim it has against A on any other account. Exercise of this contractual right of set-off will, of course, result in B Bank being paid its claim up to the amount of the deposit. The set-off thus fulfils an important security function. But is it a security in law? We can only answer this question by going back to fundamentals. A security interest is a real thing in the asset given in security. A right of set-off, even if given by contract, is a purely personal right to set one claim against another. The party asserting it never acquires rights in the other’s monetary claim at all; he merely asserts a countervailing claim which operates in pro tanto extinction of his monetary liability. It follows that a contractual set-off does not create a security interest. 12 We respectfully accept this as a correct and accurate description of the nature of the contractual right of set-off. In our opinion, a right of set-off is not a security within the meaning of s 227C(b) or s 227D(4)(d) of the Act. Accordingly, the respondents‌, in exercising the right of set-off, did not contravene the provisions of these two sections.’ The passage quoted from Goode’s second edition also appears in the current fifth edition at paragraph 1-20. In Bank of Credit and Commerce International S.A (No. 8) [1998] AC 214, the House of Lords held that a creditor can obtain security over its own obligation, so that a bank can take a charge over its customer’s credit balance. This case serves to illustrate whether an equitable charge arises in a particular situation. It does not add further to the principle on how an equitable charge may arise. Hence, it is not necessary to discuss this case in detail. The case of Re Choi Lai Ming, ex p Official Receiver [2006] 1 HKLRD 7 is relevant. The headnote reads that the Hong Kong Government (G) sought declarations with respect to B, a bankrupt civil servant, who had previously obtained a home loan (the home loan) under G’s Home Financing Scheme,‌ that: (a) it was a secured creditor, in respect of B’s salary,‌ pension and other amounts due to B from G; and (b) accordingly,‌ it was entitled to make deductions from his salary to effect repayments of the home loan, which it was currently doing.‌ To obtain the loan, B had completed formal application (the formal application) to the Director of Accounting Services (DAS). This provided that the DAS had the right to recover any loans from his salary or any monies due for whatever reason from G; and that the applicable Civil Service Regulations (CSRs) formed part of the loan terms. The CSRs provided that repayment was to be effected through monthly deductions from salary. The formal application was accompanied by an agreement form which stated that the agreement was made between G and B. B also executed a second legal charge against the property concerned in favour of the Financial Secretary Incorp (FSI) for the loan. This second legal charge described the FSI as ‘the Lender’. Barma J (as he then was) held that the Government was a secured creditor in relation to the salary of the civil servant : ‘ 46. In this case, so far as salary is concerned,‌ the most relevant provisions are, to my mind, cls. 4 and 5 of the formal application (the latter of which brings in the CSRs), Cl. 1(d)(ii) of the agreement form for repayment of downpayment loan, and CSRs 1670(a), 1673(b) and 1741(b). The effect of these provisions (in particular CSR 1670(a)) is that it was expressly agreed between Mr Choi and the Government that payment of the instalments by which the downpayment loan and interest on it was to be repaid would be effected by deduction from his monthly salary. This therefore authorised the Government to repay itself out of Mr Choi’s salary. The authority to do so was,‌ moreover,‌ irrevocable, since Mr Choi could not revoke it without being in breach of his agreement. The authority was also, I think, irrevocable, in that being embodied in the CSRs, it could only be changed by the Government,‌ and not by Mr Choi.’ To the argument that the provisions relied upon by the Government were by their nature only personal agreements given by the civil servant to repay the loan and could go no further than providing the Government with a right of setoff,‌ but not security, Barma J held that : ‘ 49. As to these arguments, I do not think that the first point taken is a good one. For the reasons which I have already endeavoured to explain, I am of the view that the provisions in question go beyond a mere undertaking or agreement on the part of Mr Choi to repay the downpayment loan advanced to him, and extend to giving the Government a right to satisfy itself out of Mr Choi’s salary which might become due to him from the Government from time to time. 50. Similarly, it seems to me to be clear that the purpose of the provisions was to enable the Government to have a measure of security for the obligations of Mr Choi in respect of the downpayment loan. The whole purpose of CSR 1670(a) is to ensure that the Government is able to recoup itself for the monthly repayment instalments that would become due.‌ While it is fair to say that the language of the provisions is not expressed in terms of the creation of a charge over Mr Choi’s salary in favour of the Government, it should also be borne in mind that it is not necessary, I think, for the precise words to be used as long as the effect of what is agreed gives rise to a charge as a matter of legal effect.’ To the argument of the absence of any equity of redemption by the civil servant in respect of his future salary,‌ Barma J held that : ‘ 51. As to the supposed absence of any equity of redemption, it seems to me that this is implicit in the fact that the Government is only entitled to make deductions from Mr Choi’s salary so long as there is something owing from him to it. Once the downpayment loan is fully repaid, the Government will no longer have any entitlement to make deductions from Mr Choi’s salary in respect of it, and should it do so, will clearly be bound to repay any over-deduction to Mr Choi.’ On the issue of pension, Barma J held that the position is similar to that of the civil servant’s salary and the government was a secured creditor in respect of the pension as well : ‘ 58. So far as Mr Choi’s pension is concerned, it seems to me that the position is similar. The question of whether the Government was a secured creditor in respect of Mr Choi’s pension was not the subject of as much argument, perhaps because this was not an asset that could form part of his bankruptcy estate.‌ However, it seems to me that the provisions of the formal application, agreement form for repayment of downpayment loan and the relevant CSRs also make it clear that it was intended that the Government should have a security interest in any pension to which Mr‍ Choi might become entitled. Apart from the provisions which give rise to the Government’s entitlement to have recourse to Mr Choi’s pension, it is to my mind significant that:- (1) the amount of the loan which can be made is limited by reference to the maximum commuted pension gratuity at the time of application; (2) interest only payments are permissible where the officer in question is due to retire within 10 years of taking out the loan, with repayment of principal to come out of his commuted pension gratuity; (3) the agreement form provides by cl. 1(b) and 2 that Mr Choi is to elect to receive a reduced pension so that the commuted pension gratuity will be sufficient to repay the outstanding loan, and that such election is to be irrevocable so long as any part of the loan remains outstanding.’‌ (emphasis added) The Supreme Court of Canada in Caisse Populaire Desjardins de 1’Est de Drummond v Canada [2009] SCC 29 Sup Ct (Can) considered the issue of contractual set-off and security.‌ The facts appeared in the headnote of the judgment. On September 18, 2000, the Caisse [a Bank] granted Camvrac [a customer] a line of credit up to $277,000. A week later,‌ Camvrac deposited $200,000 with the Caisse in accordance with a ‘Term Savings Agreement’. Under the agreement, the deposit was neither negotiable nor transferable. On the same day,‌ the Caisse and Camvrac entered into a ‘Security Given Through Savings’ agreement in which Camvrac agreed to maintain and permit the Caisse to retain the deposit of $200,000 for the duration of its indebtedness to the Caisse. It also agreed that, in the event it defaulted, there would be compensation between the credit agreement and the term deposit (i.e. setoff). Camvrac defaulted on the loan on 25 November 2000, and later made an assignment in bankruptcy.‌ The Caisse noted on its copy of the ‘Term Savings Agreement’ :‌ “To be closed on 21/2/2001 to realize on security.”‌ Since Camvrac had failed to remit to the Crown income tax and employment insurance premiums deducted at source, the Crown gave the Caisse notice to pay the amount owing to the Crown from the proceeds of the deposit. Section 227(4.1) of the Income Tax Act (‘ITA’) and section 86(2.1) of the Employment Insurance Act (‘EIA’) create a deemed trust in favour of the Crown over property of the employer that has deducted income tax and employment insurance premiums at source. This trust applies to property of an employer and property held by any secured creditor of the employer that, but for its security interest, would be property of the employer. The property is impressed with the deemed trust at the time the unremitted amounts were deducted at source by the employer. The Caisse unsuccessfully challenged the recovery process. The prothonotary, the Federal Court and the Federal Court of Appeal held that the Crown was entitled to recover the amounts due and the interest paid at the rate provided for in sections 36(2) and 37(2) of the Federal Courts Act. In that case, the deposit was for a fixed term, and the debtor was not permitted to withdraw the money before the end of the term, or at any time until all amounts due under the credit line were repaid, transfer or charge the deposit. The majority decision of McLachlin C.J. Binnie, Fish, Charron and Rothstein JJ held that the agreement between the bank and the customer gave rise to a security interest. Rothstein J delivering the majority judgment held that : ‘ [23] I do not think it is correct to make a blanket determination that a contractual right to compensation or a contractual right to set-off can never be associated with a “security interest” or that they are always associated with a “security interest”. Whether a contract providing for a right to compensation or a right to set-off also gives rise to a “security interest”‌ within the meaning of s. 224(1.3) ITA requires that the terms of the contract be carefully considered to determine whether the parties intended to confer on one party or the other “any interest in property [of the other party] that secures payment or performance of an obligation”. [24] In The Law of Set-Off (3rd ed. 2003), Professor S. R. Derham argues, I think persuasively, that some contracts including a right of set-off (or, in this case, contracts including a right of compensation)‌ should be said also to involve security. As an example of a set-off agreement that also contains a security interest, Professor Derham describes a situation very similar to the one before this Court in the following words, at para. 16.82: ...a bank as a condition to the grant of a facility requires that a deposit be made with it which the depositor is not permitted to access until all indebtedness under the facility has been paid, and the parties agree that the bank may appropriate the deposit in discharge of the debt in the event of default in payment. The essence of the arrangement is that the depositor’s property, in the form of the account in credit, is to function as a security. Indeed, in the case of a charge-back in which express words of charge are used, a contractual set-off is the very remedy that would be contemplated .... [Emphasis added.] [25] The essence of contractual compensation or set-off is that the terms of the contract reflect the mutual intention of the parties: see Derham, at para. 16.86. If their mutual intention is to create a security interest to ensure that the right of compensation or set-off will be an effective remedy, there is no reason to think that a security interest does not exist simply because the parties have chosen one mechanism for realizing on the security,‌ rather than another. What must be considered is the substance of the agreement. If the substance of the agreement demonstrates that the parties intended an interest in property to secure an indebtedness, then a security interest exists within the meaning of s. 224(1.3) ITA.’ Rothstein J earlier contrasted the security created in that case with the following situation : ‘ [33] The situation in this case is in contrast to one in which a bank has what may be a standard term in deposit agreement that any credit in the customer’s account may be appropriated by the bank in discharge of the customer’s potential indebtedness to the bank.‌ In that case, there is no obligation on the customer to maintain a specific sum or, indeed, any amount deposited in the account at all as security for a loan that may or may not exist. There is no continuous right in the customer’s property to protect the bank against default. The customer may withdraw any or all of the amounts in the account at any time. No specific property secures repayment. In these circumstances, based on this type of deposit agreement, the customer’s property—its right to claim a deposit—cannot be said to secure its indebtedness to the bank. Unlike the case before this Court, this is a simple contractual right to setoff or compensation without attendant security.’ The contrary situation is very much like the situation in the Singapore case of Electro-magnetic (S) Ltd. LeBel and Deschamps JJ dissented. Deschamps J delivering the minority judgment held that : ‘ [102] Although it is true that compensation can be likened to a security interest, it cannot be equated with one in the sense that the term “security interest” must be given in the context of s. 224(l.3) ITA. Where compensation may be effected between two debts, the effect is clearly analogous to that of a “security interest” in the broad sense of the term;‌ nevertheless, compensation or set-off is not regarded,‌ in the positive law of either Quebec or the common law provinces, as having the characteristics of a real right. The automatic extinction of mutual debts is an effect of compensation, but it does not constitute the enforcement of a real right in the property in question.‌ Since compensation is not specifically mentioned in the definition of “security interest” in s. 224(1.3) ITA,‌ I find that it is not a security interest for the purposes of that provision. ..... [107] ...Professor Goode [4th Ed] adds the following,‌ at para. 1-19 [the equivalent paragraph in the current 5th ed is para. 1-20] : A right of set-off, even if given by contract, is a purely personal right to set one claim against another. The party asserting it never acquires rights in the other’s monetary claim at all; he merely asserts a countervailing claim which operates in pro tanto extinction of his monetary liability. It follows that a contractual set-off does not create a security interest. ..... [108] Although I will be discussing the reasons of Rothstein J. below, I wish at this point to draw attention to one aspect of his reasoning. He relies on an excerpt from S. R. Derham’s book The Law of SetOff (3rd ed. 2003) to conclude that if the parties intended to create a security interest, that interest must be covered by the definition in s. 224(1.3) ITA.‌ With respect, the following statement by Derham must be borne in mind: “... the predominant view is that a setoff agreement is not a charge”‌ (para. 16.80).‌ Thus, it must be understood that the passages cited by my colleague are part of a discussion of arguments in support of an unconventional approach.‌ As with my rejection of Duboc’s novel interpretation of French law, I find that it would not really be appropriate to incorporate into federal law a concept that is not recognized at common law and is totally unknown in civil law. In my view, it is very dangerous to assert that a real right in property can result from the parties’ intention without basing that assertion on a mechanism known to the law. [109] This review of the academic commentaries thus leads me to conclude that, under the common law as it now stands, set-off is excluded from the field of personal property security. The fact that a legal mechanism enables a creditor to obtain an effect similar to that of a “security interest” in the generic sense of the term does not make that mechanism a security interest.’ It should be noted that the current fourth edition of Professor Derham’s book at paragraph 16.95 is not in the same terms as the one quoted by Deschamps J. In response to the minority judgment, Rothstein J stated that : ‘[38] With respect to my colleague’s reliance on academic authorities who say that a contractual right to set-off does not confer on a creditor an interest in property, I understand these authorities differently than my colleague. Professor Derham explains that a contract containing a right to set-off like the one at issue in this case can also confer on a creditor an interest in a debtor’s property: see Derham, at para. 16.82.’ In respect of the minority’s reliance on Professor Goode’s view and other academics’ view, Rothstein J held that : ‘ [39] It appears these authors were considering a bare right to contractual set-off such as the standard form deposit agreement I have discussed above. I believe these authors are saying that the remedy of set-off results in no property of the debtor coming in the hands of the creditor as the result of a setoff. All that occurs is the extinguishment of mutual debts.‌ These authors are not addressing the period of time before set-off takes place where, as in this case, the creditor has taken steps to place restrictions on the debtor’s property to ensure that the creditor continuously remains liable to the debtor so that the setoff remedy will be effective.’ 4) Academics’ view There is a lively academic debate on contractual setoff and security. Goode 5th Edition at paragraph 1-17 states that : ‘ ... A fixed, or specific, consensual security interest possesses the following characteristics: (1) it is a right given by a debtor to a creditor in an asset; (2) the right is by way of grant of an interest in the debtor’s asset, not by way of reservation of title to the creditor; (3) the right is given for the purposes of securing an obligation; (4) the asset is given in security only; not by way of outright transfer; and (5) the agreement restricts the debtor’s right to dispose of the asset free from the security interest.’ Goode, paragraph 1-20 discussed the difference between contractual setoff and security interest and BCCI (No. 8). ‘ Contractual set-off A deposits money with B Bank under an agreement which empowers B Bank to set-off against its deposit liability any claim it has against A on any other account. Exercise of this contractual right of set-off will, of course, result in B Bank being paid its claim up to the amount of the deposit. The set-off thus fulfils an important security function.‌ But is it a security in law? We can answer this question only by going back to fundamentals. A security interest is a real right in the asset given in security. A right of set-off, even if given by contract,‌ is a purely personal right to set one claim against another.‌ The party asserting it never acquires rights in the other’s monetary claim at all; he merely asserts a countervailing claim which operates in pro tanto extinction of his monetary liability. It follows that a contractual set-off does not create a security interest.‌ However, the distinction between contractual set-off and security has become blurred by the decision of the House of Lords in Re Bank of Credit and Commerce International SA (No. 8) to the effect that there is no conceptual barrier to a person charging back to its creditor the obligation owed to it by that creditor.‌ But since the only method of realising the charge is by a book-entry debit to the account recording the chargee’s indebtedness, which is the self-same method utilised to effect a contractual setoff, it seems that the only way of distinguishing a charge over the debtor’s obligation from a contractual set-off is by the label given to the agreement by the parties, a point to which we shall return.’ Goode, paragraph 1-21 discussed the Canadian case of Caisse Populaire in respect of the difference in view of the majority and minority. In respect of the contractual terms relied upon by the majority namely, the deposit was for a fixed term, and the debtor was not permitted to withdraw the money before the end of the term (the fixed term obligation), or at any time until all amounts due under the credit line were repaid (a flawed asset), could not transfer or charge the deposit (a negative pledge clause), the author is of the view that such provisions do not have the effect of creating a security interest : ‘ Under English law the issue is whether there is a contractual appropriation of an asset of a debtor (A) to payment of the debt owed by A to B. It has already been made clear that a mere agreement for set-off is not such an appropriation of the asset represented by B’s debt to A which arose on the making of the deposit.‌ Instead, it confers on B a right to extinguish or reduce its debt to A by asserting its own claim. Is that (personal) right changed by contractual provisions entitling B to refuse to extinguish or reduce that debt by any other means than set-off (the fixed term obligation and the flawed asset provision)? As discussed below, this right to withhold repayment cannot be seen as an appropriation of the asset to the debt: it merely defines the nature and scope of the payment obligation. Is the personal nature of the right of setoff changed by a provision prohibiting A from charging or assigning the debt due from B to A (the negative pledge)? As discussed below, a covenant not to encumber gives B no rights in the asset at all: it is a purely contractual obligation which can only attract personal remedies. Although these contractual rights have the economic effect of preserving B’s ability to extinguish its obligation by setoff when, if the obligations were differently constituted, that ability could easily be lost, this does not make the combination of rights a security interest.’ Derham on the Law of Set-off, 4th Edition 2010 disagreed with Goode’s view that the contractual terms are in the nature of personal obligations. The author stated that : ‘ 16.95 ...What then is the basis of the view that a setoff agreement is not a charge? Statements to the effect that the agreement confers a purely personal right, or that it gives no right over the creditor’s asset, do not advance the argument. They merely constitute different expressions of the conclusion.‌ Why is the right is to be regarded as purely personal rather than proprietary? 16.96 The essence of an equitable charge is that specific property is appropriated to the discharge of a debt or other obligation, without there being a change of ownership either at law or in equity. A commonly cited definition is that of Atkin LJ in National Provincial and Union Bank of England v Charnley: It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession ... ...... 16.97 At first blush those principles seem apt to encompass some set-off agreements, for example where a bank as a condition to the grant of a facility requires that a deposit be made with it which the depositor is not permitted to access until all indebtedness under the facility has been paid, and the parties agree that the bank may set off the deposit against the debt in the event of default in payment.‌ The essence of the arrangement is that the depositor’s property, in the form of the account in credit resulting from the deposit, is to function as a security.‌ Indeed, in the case of a charge-back in which express words of charge are used, a contractual set-off is the very remedy that would be contemplated, and the House of Lords has now confirmed that a charge-back can be effective to create a proprietary interest in the indebtedness of the party asserting the right. It would be odd in those circumstances if an express contractual stipulation for a set-off were to be regarded as inconsistent with a charge. In Caisse populaire Desjardins de l’Est de Drummond v Canada the Supreme Court of Canada accepted that a set-off agreement in this situation would involve a security interest. ....... 16.101 In the context of a set-off agreement which permits one party to set off cross-debts, there is no justification for limiting the term ‘set-off’ to a situation in which the debtor uses its asset to pay its debt, as opposed to using the creditor’s asset to pay the creditor’s debt. Both are appropriately described as set-offs. As a consequence, the question whether a particular agreement is a charge should not be determined by reference to whether it is labelled a ‘setoff’, but rather by an examination of the terms of the arrangement. The label itself means nothing.‌ The true position is that some set-off agreements are charges and some are not.’ 5) The basis of the defendant’s case Ms Ismail advanced six reasons why section 31(2) of PBO creates a statutory charge on the pension benefits : (1) Section 31 results in the appropriation of specific property (at the rate of up to 25% or 100% of pension benefits under section 31(2)) to the discharge of a debt owed to the Government. (2) It is misconceived to equate section 31 with a contractual set-off. Section 31, read purposively and in context, provides for the following : (2)(i) The Government is given an absolute right to apply up to 25% (or 100% in debt arising from tax) without any consent of the pensioner for satisfying Government debts. (2)(ii) The Government is given such right irrespective of satisfaction of requirements of set-off, such as mutuality of debts (in equitable set-off) or contractual agreement (in contractual set-off). (2)(iii) The pensioner is restricted from assigning or transferring pension benefits to other creditors. Such benefits cannot be attached, sequestered or levied upon for other debts either. Even in the exceptional case of the PO(AE)O, there can be at most assignment of up to 25% or 50% (section 5), and it would be subject to written permission of an authorized officer of the Government (and subject to bankruptcy). All these prohibitive or restrictive provisions preserve the Government’s right to apply pension benefits for satisfaction of Government debts. (2)(iv) Goode, paragraph 1-20 acknowledged that the position is a versatile one. (3) The majority in Caisse Populaire took the view that, although the provisions of contractual setoff in an agreement individually created personal obligations,‌ collectively they amounted to the creation of a security interest.‌ Section 31 of the PBO never employs the label of setoff.‌ Section 31 does not merely create personal obligations. It generally prohibits assignment or transfer of pension benefits, save as provided. Any purported assignment or transfer in contravention of section 31 will be void and of no effect. The clear legislative intent of section 31 is to confer on the Government an interest in the pension benefits of the pensioner that secures payment of Government debts. What section 31(2) achieves is a statutory charge by a pensioner to the Government in the form of a right to deduct pension benefits for satisfaction of Government debts without the pensioner’s consent. (4)(i) In the case of other creditors, even if assignment or transfer is authorized under the PO(AE)O, such assignment shall be revoked on the making of a bankruptcy order by virtue of section 6(1)(c). In contrast, in the case of the Government,‌ there is no prohibition of assignment or transfer (as such assignment is not created under that ordinance.) (4)(ii) Sections 28 and 31 of the PBO should be construed consistently, having regard also to section 6(1)(c) of the PO(AE)O. The clear intent is to protect pension benefits from non-Government creditors, both with or without bankruptcy,‌ whilst enabling those benefits to repay Government debts.‌ This explains why only assignments to nonGovernment creditors are revoked on bankruptcy. (4)(iii) An assignment of pension benefits to the Government caters for the scenario where, with the consent of the pensioner, the Government may apply up to 100% of pension benefits for satisfaction of Government debts. Such assignment would clearly be a transfer of beneficial ownership in rights to future payments, and therefore a contractual security interest. It would not be necessary to enter into such assignment if the Government is content with the 25% limit.‌ There is a clear legislative intention for the Government’s right (as contrasted with other creditors’ right) to make deductions from pension payments to survive bankruptcy.‌ However, there is no good reason for a contractual assignment of 26 to 100% of pension payments to be regarded as a security interest, whilst the statutory 25% right of deduction is not.‌ Otherwise, even if the Government is only minded to apply up to 25% deduction of pension benefits, it would still be necessary for the Government to obtain the consent of the pensioner to enter into an assignment in order to obtain protection for the eventuality of bankruptcy. This can hardly be reconciled with the legislative intention to confer the right of 25% deduction of pension benefits on the Government irrespective of whether the pensioner consents or not. (5)(i) The above is supported by the drafting history and intent of the PBO. The original version of section 31(2) of the PBO found in the Pension Benefits Bill 1987, provides : ‘ 31. ... (2) Where any person who is granted pension benefits owes a debt to the Government, the Director of Accounting Services may, whether or not with the consent of the person, make such deductions from the pension benefits, not exceeding 25 per cent thereof, as the Director of Accounting Services thinks fit for the purpose of satisfying the debt; but the maximum of 25 per cent shall not apply to any tax payable under the Inland Revenue Ordinance.’ (5)(ii) In 1988, section 31 of the PBO was amended to its present form by the Pension Benefits Bill 1988. Paragraph 7 of the Explanatory Memorandum to the 1988 Bill provides : ‘ 7. Clause 7 amends section 31 of the Pension Benefits Ordinance 1987 which controls the assignment of pension benefits and enables those benefits to be used in a particular manner to repay debts due to the Government. The amendment removes an overall limit ... of 25% of the relevant pension benefit in determining the amount which may be allocated by the Director of Accounting Services under that section. The amendment provides that as regard debts (other than such tax), where the person concerned consents there will be no limit but if he does not consent the position will remain the same as before the amendment was enacted (i.e. there will be a 25% limit) ....’ (6) All of the elements of a security interest identified in Goode, paragraph 1-17, as applied in Re Choi Lai Ming paragraph 57, are present here : (i) It is a right given by a debtor (P) to a creditor (the Government) in an asset (pension benefits).‌ (ii) The right is by way of grant of an interest in the debtor’s asset (pension rights), not by way of reservation of title to the creditor (section 31 does not involve reservation of title or provision empowering the Government to repossess upon default). (iii) The right is given for the purposes of securing an obligation (debts owed to the Government). (iv) The asset is given in security only (the Government can only apply them for satisfaction of Government debts), not by way of outright transfer.‌ (v) Section 31(1) of PBO restricts the debtor’s (P’s)‌ right to dispose of the asset (pension benefits) free from the security interest. 6) My view on security (1) Contextual interpretation In my view, the starting point of the enquiry is to examine the context of the PBO. The civil service pension scheme had been in operation since 1949 and modernised in 1987 by the PBO. It was enacted for the purpose of introducing a new pension benefits scheme in which the Government being the employer is to award pension benefits for retired civil servants after fulfilling the requisite years of service. As recorded in the first reading of the Pension Benefits Bill 1987 pensions are made a right : Hong Kong Hansard, Session 1986/87 page 1700. The long title of the PBO states that it is ‘to make provision for the granting of pension benefits in respect of the public service, and for purposes connected therewith.’ Details concerning the retirement age, pension factor, circumstances under which the pension may be granted, cancelled, suspended or reduced and the terms and conditions upon which payment of pension may be made or reduced are fully set out in the ordinance. In 1988, the PBO was further amended in relation to the limitation on the amount of deduction which can be made from the civil servant’s pension benefits for the recovery of debts due to the Government. This is recorded at the second reading of the proposed amendment : Hong Kong Hansard, Session 1987/88, page 1722 : ‘ On the second item, section 31(2) of the Pension Benefits Ordinance inadvertently imposes a limitation on the amount of deductions which can be made from an officer’s pension benefits for the recovery of debts due to the Government, even though the officer concerned may have consented to larger deductions.‌ The original intention was that there should be a limit on deductions, at 25 per cent of pension benefits, only where the officer does not consent. The legislation in its existing form has caused practical difficulties to the Government in the administration of the civil service Housing Loan and Down Payment Loan Schemes.‌ Clause 7 of the Bill, therefore, seeks to rectify the situation and clause 8 effects a similar amendment to section 12 of the Pensions Ordinance to cover arrangements under the old pension scheme.’ It is fair to say that the PBO is not enacted for regulating all activities of the Government and the civil servants.‌ For example, where the Government lends housing loans to a civil servant and obtains security (either on the property which the civil servant used the loan to acquire, or on the pension benefits that the civil servant may eventually receive from the Government), the Government can and does regulate these arrangements by requiring the civil servant to enter into contractual agreements with it. The context is important when one considers the commercial cases referred to by the parties where the courts have to decide whether the terms of the commercial agreements between the parties create a security in favour of the financial institutions against their customers. The emphasis there was naturally focused on the intention (be it express, implied or presumed) of the parties. But in this case, unless it can be argued that the statutory provisions proceeded on the basis of the existence of such a common intention, the task of this Court is simply to ascertain from the provisions whether a security had been created. The intention in such a case is not a common one but rather imposed unilaterally by the legislature. (2) The fundamental principle In respect of the many authorities and academic views cited, lest one should fail to see the wood for the trees, it is important to go back to the fundamental principle that an equitable charge is only created where there is an appropriation of a particular fund by the debtor for the discharge of his debt in favour of the creditor so that the creditor may have a proprietary interest in the segregated fund. Although section 31(1) of the PBO excludes the alienation of pension benefits, other than, amongst other things,‌ to the Government itself in respect of the debts owing to it by the civil servant, what it does not do is to require the civil servant to assign the pension benefits to the Government at any time during his or her service. Nor does it require the civil servant to perform certain acts (such as segregating a specific part of the pension benefits) which have the effect of creating a security in favour of the Government in respect of his or her debts owing to the Government. This is to be contrasted with the situation where there are express provisions contained in the agreements of the parties which have the effect of creating a charge on the pension benefits in favour of the Government as in Choi Lai Ming. In that case, although the terms of the contractual documents, namely, ‘the agreement form for repayment of downpayment loan’ contained a term similar to section 31(2) that any outstanding loan may be recovered by the Government from the pension benefits at the time of the civil servant’s retirement, in addition there was the express provision (which in my mind sets the present case apart) that the civil servant is required to commute part of his pension so that the amount of the commuted part is not less than the total amount of the principal advanced together with interest. The effect,‌ as pointed out by Barma J, is that the commuted pension will be sufficient to repay the outstanding loan and that such election is irrevocable so long as any part of the loan is outstanding. Under the civil service pension scheme, a civil servant has a choice of commuting a part of his pension benefits into a lump sum payment on retirement and receiving the balance by way of monthly payments, or he or she may choose to have all the pension benefits paid by way of monthly payment. Such a choice was no longer available to the civil servant in Choi Lai Ming because of the agreement he had reached with the Government and one can say that the intention of the parties there was to create a security in favour of the Government by the segregation of specific parts of the pension benefits. By contrast, absent any similar provision in section 31 which requires the appropriation of a specific sum of the pension benefits to match the amount of the debt when such debt is incurred, how can it be said that the Government has acquired a real right in the civil servant’s pension benefits entitlement? Ms Ismail placed great emphasis on the nonalienation of the pension benefits except for the purpose of satisfying a debt due to the Government or satisfying a maintenance order for the spouse and children of the civil servant. In my view, section 31(1) is a general provision which applies to all civil servants irrespective of whether they owe any debts to the Government. The purpose is to ensure the pension benefits will be available to the civil servant on his retirement. The non-alienation provision of section 31(1) is also to provide the Government with protection from dealing with strangers to safeguard the civil servants’ pension benefits on retirement. Reference may be made to Ng Shiu Fan, where this Court considered the nonalienation provision in section 85(3) of the Education Ordinance (section 85(3)),‌ which provides : ‘ ... (3) Subject to any rules made under sub-s.(1), no contribution or donation to or dividend or interest on a dividend from a provident fund shall be assignable or transferable or liable to be attached, sequestered or levied upon, for or in respect of any debt or claim whatsoever.’ This Court held that : ‘ 13. It is obvious that the idea behind s.85(3)‌ is that the Benefits should be allowed to grow.‌ That purpose would be defeated if the Benefits could be assigned or transferred by a contributor.‌ Section 85(3) should also discourage people from over-extending credit to a contributor since they cannot readily access the fund for repayment to themselves.’ There is no doubt that section 31(2)(a) allows the Government to set off debts owing by the civil servant to the Government from his or her pension benefits, but this is not in the nature of a charge at all. In my view, the Government is merely asserting a countervailing claim in respect of the civil servant’s liability for the debts which operates in extinction for so much of the Government’s liability for the payment of pension benefits towards the civil servant. When its legislative history is properly considered, it is clear that the provision for deduction (be it 25% or otherwise) is simply to impose a limit on the deduction depending on whether the deduction is consensual or not. There is no segregation of a specific fund in the first place which may have the effect of creating a security in favour of the Government. Ms Ismail argued that there are two overarching legislative policies behind the provisions of sections 28 and 31 of PBO, namely : (i) The pension benefits should be protected from the claims of non-Government creditors and be excluded from the bankrupt’s estate and kept for the officer’s retirement; (ii) The Government is exempted from that, in order to protect the Government’s funds and to enable Government debts to be repaid out of pension benefits. I do not see how section 28 will assist in the construction. The function of section 28(1) is to cause the pension to cease to be paid upon bankruptcy and section 28(5)‌ restores it upon discharge of the bankruptcy order. These measures are clearly meant for the protection of the bankrupt civil servant in that the pension benefit will not form part of the bankrupt’s estate. Likewise are the provisions under PO(AE)O.‌ But whether a charge has been created must be ascertained solely by reference to the wording of section 31(2). Further, the important question is when is the security created? Ms Ismail submitted that the charge is created when the pension is granted even if at that time there is no debt in existence. This cannot be right as an equitable charge requires the appropriation of property to the discharge of a debt (Swiss Bank, 594). Further, the wording of section 31(2) clearly envisages the prerequisite of the civil servant owing a debt to the Government. This really highlights the difficulty of trying to engraft onto legislation the existence of a charge when the wording simply does not support such a construction. As the Canadian case of Caisse Populaire emphasised, what must be considered is the substance and not the label. In my view the statutory provisions in the present case do not in substance create a charge. Whilst there is restriction on the civil servant to alienate the pension benefits,‌ there is no requirement that a specific fund is to be segregated for the purpose of enabling the Government to set off from it the debts of the civil servant. My view is that section 31(2)‌ whether by itself, or, read together with sections 28 and 31(1),‌ does not enable one to detect the intention to impose a charge.‌ Had the Government really intended to create a security in the pension benefits, there really would have been no difficulty for the Government to make express provisions in the legislation.‌ The natural meaning of the legislation must be given effect and the absurdity argument simply does not arise. I hold the Government does not hold any security in the pension benefits and is therefore not a secured creditor. VII. Surrender or waiver The plaintiff’s arguments 1 Mr Koo made the point that the Government had surrendered its security for the payment of the debt. The Judge disagreed. The matters relied upon by Mr Koo are that : 1) The Statutory Demand dated 3 November 2004 issued by the Government expressly stated that the debt was ‘unsecured’. The note on the Statutory Demand stated that ‘If the creditor holds any security the amount of the debt should be the sum the creditor is prepared to regard as unsecured for the purposes of this demand. Brief details of the total debt should be included in column (2), and the nature of the security and the value put upon it by creditor, as at the date of the demand, must be specified’. 2) The Government also stated in the Bankruptcy Petition that ‘The petitioner does not... hold any security on the debtor’s estate’. 3) In the Proof of Debt submitted by the Government dated 7 February 2006, the ‘Important Notes for Creditors’‌ expressly stated that, ‘Incorrect completion of the form ... may also affect ... “any security ...”’, and that, ‘If you fail to disclose your security, you may be deemed to have surrendered that security for the general benefit of the creditors’. There are rules under the bankruptcy regime dealing with a secured creditor surrendering his security.‌ Thus, Rule 99I of the Bankruptcy Rules (Cap. 6A) provides that : ‘ (1) For the purpose of voting, a secured creditor shall, unless he surrenders his security, state in his proof the particulars of his security, the date when it was given and the value at which he assesses it, and shall be entitled to vote only in respect of the balance (if any) due to him after deducting the value of his security. (2) If he votes in respect of his whole debt he shall be deemed to have surrendered his security unless the court on application is satisfied that the omission to value the security has arisen from inadvertence.’ Further, Rule 5A of the Proof of Debt Rules (Cap. 6E) states that : ‘ If it is found at any time that the proof made by ... a secured creditor has omitted to state that he is a secured creditor, the secured creditor shall surrender his security to the trustee for the general benefit of the creditors unless the court on application is satisfied that the omission has arisen from inadvertence in which case the court may allow the proof to be amended upon such terms as to the repayment of any dividends or otherwise as the court may consider just.’ Mr Koo’s point is that where the Government took out the bankruptcy proceedings against the plaintiff as a final step to recover the debt, the Government had knowingly made an election between two inconsistent options, i.e. either (1) to wait until the pension becomes payable and then exercise the statutory right of setoff of 25% thereof, or (2) to commence bankruptcy proceedings claiming forthwith full recovery of the debt. Upon making the election, the Government knew that once the plaintiff was adjudged bankrupt, it would no longer be entitled to rely on the statutory set-off under section 31(2) of PBO, including during the bankruptcy (due to the non-alienation provisions) and after the discharge of bankruptcy thereof (by virtue of section 32 of BO). 2) My view on surrender or waiver In my view, Ms Ismail is probably right when she submitted that the concept of surrender of security under the bankruptcy regime presupposes that, but for the existence of security, the property in question would vest in the trustee in bankruptcy for the general benefit of creditors on a pari passu basis. As remarked in McPherson’s Law of Company Liquidation (3rd Ed, 2013), paragraph 12-030 (footnote 182 at page 822) the rule on surrender of security applies only to a security which, if given up, would augment the estate against which the creditor seeks to prove (see also Re Toronto Diaries Ltd [1952] 3 DLR 212). Section 28 of PBO prevents the vesting of the plaintiff’s pension in the trustee in bankruptcy (irrespective of the issue whether the defendant is a secured creditor or not). Hence, no question of the defendant’s surrender of its security in the pension benefits ‘to the trustee for the general benefit of the creditors’ can ever arise.‌ It should also be noted that in the case of a deferred pension,‌ payment is deferred until the officer attains the age of 55, and if he dies before then, the death gratuity is quantified differently under section 20. It is difficult to see how that fits into surrender of a security or the valuation of it. Likewise, the same argument applies to the question on waiver. In other words, there is nothing to be waived if the pension benefits do not fall within the bankrupt’s estate because of section 28.‌ However, in view of my decision that the Government is not a secured creditor, it is not necessary to reach a concluded view on this matter. VIII. Effect of section 31(2) after discharge of bankruptcy 1 The final question is the effect of Section 31(2) of the PBO after a bankrupt is discharged from bankruptcy. Ms Ismail argued that even if section 31(2) of the PBO does not create a security interest, the right to deduction,‌ nevertheless, survives bankruptcy. Her argument is premised on the exclusion of pension rights from the bankruptcy estate pursuant to section 28 of the PBO, and the legislative intention to draw a balance between protection (from general creditors) of the pension rights for the civil servants’‌ retirement and protecting the Government’s position if it is a creditor as well as debtor in respect of the pension. Ms Ismail further argued that it is contrary to legislative intent to construe section 31 as ceasing to be available upon bankruptcy because this would have an adverse impact on the Government’s right of recovery. This would mean that, in order to protect pension benefits from claims of other creditors (and the Government’s ability to claim 100%‌ bankruptcy set-off), section 28 of PBO went so far as to remove the Government’s rights altogether (as opposed to the section 31(2) deduction of up to 25%). This would lead to potential abuse. A pensioner owing debts to the Government could petition for his/her own bankruptcy and thus evade the consequence of deduction under section 31(2) of PBO.‌ Further it would result in absurdities and a windfall to the plaintiff if, as a result of the non-alienation provisions under section 28 of PBO (which targets other creditors), the Government would incidentally lose its right to invoke section 31(2) of PBO against the plaintiff. I disagree. There really is nothing in the BO or in the PBO which shows that, notwithstanding the clear wording of the provision on release of all the debtors’ debts upon discharge, debts owing to the Government is given special treatment so that they survive after the discharge of bankruptcy.‌ After all, as the Law Reform Commission of Hong Kong pointed out in its Report on Bankruptcy at paragraph 1716, the introduction of automatic discharge would have the effect of,‌ among other things, assuring rehabilitation of a bankrupt from bankruptcy.‌ Again, the wording of the legislation must be given its natural meaning. If considered appropriate, the Government can protect itself by making specific provisions of securing a charge on pension benefits in respect of debts owing to it by civil servants. IX. Conclusion Accordingly, the appeal is allowed and the plaintiff is entitled to the relief sought by him below. X. Costs There will be an order nisi that the plaintiff is to have the costs of the appeal and below. The plaintiff’s own costs are to be taxed in accordance with the Legal Aid Regulations. Hon Yuen JA : I agree with the judgment of Cheung JA. Hon Kwan JA : I agree with the judgment of Cheung JA. (Peter Cheung) (Maria Yuen) (Susan Kwan) Justice of Appeal Justice of Appal Justice of Appeal Mr Ernest Koo, instructed by Stanley K. Y. Ng & Co., assigned by Director of Legal Aid, for the plaintiff Ms Roxanne Ismail S.C. and Mr Jenkin Suen, instructed by Department of Justice, for the defendant