Kwok Chi Leung Karl v. The Commissioner of Estate Duty

HCMP002745/1985

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BETWEEN

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Coram:  Jackson-Lipkin, J. in court.

Dates of Hearing:  9th & 12th May 1986.

Date of delivery of Judgment:  14th May 1986 at 9.30 a. m.

Appearances: Dicks for the Plaintiff.

Hamlin for the Defendant.

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JUDGMENT

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1. In this Matter, the Plaintiff seeks a declaration that the situs of a non-negotiable promissory note executed by Tolu Limited ("Tolu"), a Liberian registered Company, in favour of the deceased is without the Colony: In Liberia to be exact. If that be so, then, by reason of section 10(b) of the Estate Duty Ordinance, the value of the Note will not be included in that of the estate of Lamson Kwok Lam Shan ("the deceased") for Estate Duty purposes.

2. The facts, as ascertained from the affidavit of Karl Kwok Chi-leung, (curiously named "Kwok Chi-leung, Karl" in the Originating Summons), and as agreed by Counsel, are that Tolu was incorporated under Part 1 of the Liberian Business Corporation Act on 25th February 1983.

3. On 28th February 1983, the Plaintiff and two of his brothers, Lester Chi-hung and Bill Chi-biu, were appointed Directors of Tolu. Then, and the date, save to say that it was before the death of the deceased, is not relevant to these proceedings, the shares in Tofu were duly and properly transferred to the lady who is now the widow of the deceased and their four sons. The deceased was never a shareholder in or a Director of Tolu.

4. At all material times the Directors of and the shareholders in Tolu were resident in Hong Kong. Two of the Directors then executed Proxies in Hong Kong to a Mr. B.J. Yeung (previously the sole shareholder in Tolu) and a Mr. Wing Cheng.

5. Six Directors' Meetings of Tolu were held - all in that Province of Portugal known in English as "Macau". They took place on 21st and 22nd March, 18th April and 12th May 1983. Only the proxies attended.

6. At the fourth such meeting, it was resolved that the company purchase certain shares from the deceased. Lester Kwok was authorized to, and did, sign a Sale and Purchase Agreement on behalf of Tolu. The deceased signed, and that agreement was made on and dated 26th April 1983: It is exhibited as K.C.L.K. 6.

7. Clause 1 of the Agreement provided that the purchase price, that is to say, US$1,807,839.24, should "..... be paid or satisfied in the manner described in Paragraph 2 ..... ".

8. I should add here, parenthetically, that the Agreement is written in a style more appropriate to the United States of America than to Hong Kong.

Clause 2 provided that: -

"

Seller agrees to accept from Buyer in consideration for the sale and transfer of the Said Shares a promissory note executed by Buyer ..... due and payable on demand after 60 days from the date hereof at city of Monrovia, Republic of Liberia. ".

9. Lester Kwok then executed a non-negotiable promissory note at 8.45 p. m. on the same day, 26th April. It reads:-

"

On demand after sixty (60) days from the date hereof TOLU LIMITED ..... promises to pay LAMSON KWOK the sum of ..... (US$1,807,829.24) ..... in Liberia for value received ..... Principal and interest shall be payable at City of Monrovia, Republic of Liberia. ".

That is also exhibited as K.C.L.K. 6.

10. The deceased died on the following day.

11. If a minute book and the books of Tolu exist, they are probably not in Hong Kong, as Mr. Hamlin, for the commissioner of Estate Duty, surmises: I have no precise information as to that. Mr. Hamlin tells me that the Company's Seal is in Hong Kong, and that averment has not been challenged. There is no record of any other meeting of the company after that of the 12th of May: Indeed of any meeting other than the six which I have mentioned.

12. Mr. Dicks for the Plaintiff said to me in his reply, "I would not seek to persuade you that the central management and control of the company was not in Hong Kong at all material times. ".

13. The company is not registered in Hong Kong under the Companies Ordinance as a foreign corporation. The company has neither address for service nor place of business in Hong Kong.

14. Those, I believe, are the relevant facts, and it is upon those that I am asked to decide, as a matter of law, whether the situs of the promissory note is in Hong Kong or not.

15. The Commissioner takes a straightforward stance. 'This is a simple contract debt. The situs of such a debt is where the debtor is. A corporation resides where its central control and management is situate. This company is therefore resident in Hong Kong. Consequently the situs of the promissory note is in Hong Kong. '.

16. The case for the Plaintiff is put thus: 'This is not a simple contract debt. It is a special kind of obligation. It is a promissory note (itself a special category). It is a non-negotiable promissory note (a special sub-category). It is not payable until after 60 days. It carries interest at 10% per annum, and it is payable only in Monrovia - indeed presentment in Monrovia is a condition precedent to payment - that is at Common Law, as provided by section 93(1) of the Bill of Exchange Ordinance and in the body of the instrument itself.

17. Being a chose in action it is situated in the country where it is recoverable.

18. The promissory note is governed by Liberian law as to which there is no evidence. Liberian law on this point, therefore, is deemed to be the same as that of Hong Kong. In Hong Kong there is no written law as to the situs of a promissory note. The Court, therefore, must fall back on the Common Law. No action on the instrument could be brought in Hong Kong unless leave to serve without the jurisdiction were to be granted under Order 11, rule 1 - which is no test of residence. '.

19. To find that the obligation contained in or evidenced by the promissory note is Liberian, is to fly in the teeth of common sense. Tax gatherers would never win a popularity poll, particularly those who prey on the dead, as does the Defendant in this case, but, if the law permits me to decide in the Defendant's favour, his unpopularity would in nowise deter me from so doing. If however, this is yet another instance of conflict between common sense and the law, the latter must (as always) prevail, and I will be obliged to make a declaration in favour of the Plaintiff, and this ingenious tax avoidance scheme will have succeeded - but has it?

20. Mr. Hamlin addressed me at some length on central management and control, but that point was conceded in reply, as I have mentioned.

21. Mr. Hamlin urges upon me that I must look, not at the promissory note, but at the underlying obligation, which is to pay the purchase price. "It is in all but name a negotiable instrument", he avers. When tendered in payment of the debt it amounts to but a discharge, and, if it be dishonoured, there is a right of action under the Sale and Purchase Agreement.

22. In my judgment that is not correct. The Sale and Purchase Agreement itself provides for the mode of payment by a promissory note - by this very promissory note, which is incorporated in the Sale and Purchase Agreement by clause 2 thereof. The promissory note is distinctly and unequivocally endorsed as non-negotiable - not merely somewhere on its face, but in the body of it as a heading. Any attempt to sue for the purchase price under clause 1 of the Agreement would be met with a reference to clause 2 (to which clause 1 itself refers). Any action in contract would have to be on the note itself.

23. Conceivably, if the Note were dishonoured, an action in damages for breach of an implied term in the agreement that the promissory note would be honoured, would lie, but that would still not make this a simple contract debt under the Sale and Purchase Agreement, upon which an action would lie without further ado.

24. The rule as to choses in action, as propounded by Dicey as Rule 76(1), is as follows:

and note (6) to that rule deals with actions in contract or tort.

25. Mr. Hamlin relies on the residence of Tolu in Hong Kong, and prays in aid the judgment of Upjohn, J., as he then was, in In re a claim by Helbert Wagg & Co. Ltd.⁽¹⁾ and in particular the passage from the first break on p.342 to the second break on p.344. ^*

26. But this is not a case of a corporation with a sole residence. Tolu has an agent for service in Liberia. (That it is also domiciled there does not affect the matter). It could be served only in Liberia, for it has no place of residence - no address, in Hong Kong where service could be effected as, for example, if International Trust Company Limited had not been appointed as such agent under chapter 3, paragraph 3:1, sub-paragraph 1 of the Business corporation Act.

27. In F. & K. Jabbour v. Custodian of Israeli Absentee Property,⁽²⁾ Pearson, J., as he then was, said at p.146:-

"

Where a corporation has residence in two or more countries, the debt or chose in action is properly recoverable, and therefore situated, in that one of those countries where the sum payable is primarily payable, and that is where it is required to be paid by an express or implied provision of the contract or, if there is no such provision, where it would be paid according to the ordinary course of business. ".

28. The commissioner relied on a number of authorities in support of his contention that the residence of the corporation governs the situs of the obligation. But every one of those was a revenue matters, turning on the precise requirements of the United Kingdom Income Tax Acts, where "residence" of a company renders it liable to tax. I agree with the summary of the position set out in Private International law by Wolff, 2nd edition, at pages 295/6, particularly at p.296 where that very learned author said:-

"

It would be improper from the use of the term "residence" in tax law to infer that the term must be used in the same sense where it is a question of the situs debiti. ".

Indeed, in New York Life Insurance Company v. Public Trustee,⁽³⁾ Pollock, M.R. referred to this very point at p.112, where he said

"

I do not refer to the income tax cases, or other tax cases, which, I think, must be considered closely in relation to the terms of the statute upon which the circumstances arose for decision. ".

The debts in that case were payable in London, and, as the company was resident in both New York and England, the Court of Appeal applied the test of the place of recoverability of the debt. The Master of the Rolls appears to have been much influenced in his decision by a dictum of Lord Esher, M. R. in Attorney-General v. Lord Sudeley & Ors.,⁽⁴⁾ where, at pages 360/1, he said:-

"

As to debts due to the testator at the time of his death, the rule to be deduced from the cases is that if the debtor is, at the date of the death of the testator, abroad, and the debt is payable only abroad, and could only be got from him abroad, either by some act to be done there or some proceeding taken there, the debt is a foreign asset; but if, although the debtor is abroad, a legal proceeding could be taken here, which would, in law, directly order and enforce the payment here of the debt, then the debt is an asset here liable to the probate duty. ".

29. Dicey's Rule 138 (supra) itself is qualified by its own notes referring to residence of corporation for the purposes of their liability to United Kingdom tax.

30. It appears that there is no authority directly in point, so I turn to an analogous situation. I shall take that of an irrevocable Letter of Credit. In Power Curber International Limited v. National Bank of Kuwait,⁽⁵⁾ referred to at p.69 of the 4th cumulative supplement to Dicey, the court of Appeal held that the lex situs of such a Letter of Credit issued by the Defendant bank in favour of the Plaintiff through the latter's bank in North Carolina, to be paid there against presentation of documents, was that of North Carolina notwithstanding the Defendant's residence in Kuwait: Lord Denning, M. R., at p.1240 F - G, said:-

"

A debt under a letter of credit is different from ordinary debts. They may be situate where the debtor is resident. But a debt under a letter of credit is situate in the place where it is in fact payable against I documents. ",

and Griffiths, L.J., as he then was, at p.1242 E - F and G - H, said:-

"

Under the letter of credit the bank accepted the obligation of paying or arranging the payment of the sums due in American dollars against presentation of documents at the sellers' bank in North Carolina. The bank could not have discharged its obligation by offering payment in Kuwait.

Secondly, it was submitted that payment was unlawful according to the lex situs of the debt which it is said is Kuwait. But this is a debt that is owed in American dollars in North Carolina; I do not regard the fact that the bank that owes the debt has a residence in Kuwait as any reason for regarding Kuwait as the lex situs of the debt. The lex situs of the debt is North Carolina. ".

I find that case of assistance, but I do bear in mind the cautionary words of the Judgment of Waterhouse, J. at p.124 B - D.

31. In the present case, presentment for payment could be, as I have said, only in Monrovia, (and the payment would be in US dollars, not Hong Kong dollars, expressed as the agreed equivalent of the Hong Kong dollar price): That presentment is both according to the tenor of the document, the statute law of the United Kingdom and of Hong Kong; the common law of England and the common law of Hong Kong. See e.g. Sanderson v. Bowes & Ors.,⁽⁶⁾ Spindler & Jessie his Wife v. Grellett,⁽⁷⁾ Sands & Ors. v. Clarke⁽⁸⁾ and. Josolyne v. Roberts⁽⁹⁾. This is particularly so where, as here, the document is endorsed with the words "non-negotiable": See Kum & Anor. v. Wah Tat Bank and Another⁽¹⁰⁾. To that extent, therefore, the judgment of Lord Abinger, C.B. in Attorney-General v. Bouwens & Ors. ⁽¹¹⁾ is of no assistance in this particular case. What the L. C. B. said, at pages 191/2 and 194, has no application where the promissory note is (a) non-negotiable and (b) payable only in one place and that without the jurisdiction, although his observations are otherwise still good law: See the New York Life Insurance company case⁽³⁾, which I have just cited, at p.107.

The position as I see it, is this:

32. On both the situs of the instrument, applying my test 2(b), and the residence of Tolu, applying my test 4, this debt or obligation, in my judgment, is without the jurisdiction.

33. It follows, from what I have said, that the device employed here by the deceased and his family succeeds, and, contrary to what I have called "common sense", the Plaintiff is entitled to the declaration prayed.

* See Appendix 2 to Judgment

(1) [1956] Ch. 323

(2) [1954] 1 W.L.R. 139

(3) [1924] 2 Ch. 101

(4) [1896] 1 Q.B. 354

(5) [1981] 1 W.L.R. 1233

(6) (1811) 14 East 500, at pp.507, 508/9

(7) (1847) 1 Ex. 384, at p.390 (p.163?)

(8) (1849) 8 C.B. 751, at p.763

(9) [1908] 2 K.B. 349, at p.351

(10) [1971] 1 Lloyd’s Rep. 439, at p.445

(11) [1924] 2 Ch. 101

(3a) [1924] 2 Ch. 101, p.107

Representation:

Solicitors: Messrs. Wong & Chiang for the Plaintiff

The crown Solicitor for the Defendant

APPENDIX I

List of cases and textbooks cited or mentioned, but not referred to in the Judgment

APPENDIX 2

In re a claim by Helbert Wagg & Co. Ltd.⁽¹⁾

"          The general rule is clear that the debt is locally situate where the debtor resides, in this case Germany. Mr. milner Holland, however, submits that that rule is altered by the terms of the contract between the parties, and he relies upon the statement to be found in the sixth edition of Dicey's Conflict of Laws, p.304: "If the place of payment of a debt be stipulated it will be there situate, the general rule notwithstanding." He also relies on a statement of the law by Eve J. in In re Russo Asiatic Bank,⁽⁸⁾ where he said this: "although as a general rule the location of simple contract debts is the place in which the debtor is to be found, that rule, in my opinion, does not apply here, where the obligation is in terms to pay in sterling in London." It is to be noted that in that case the debtor resided both in Russia and in England, and in those circumstances it was a perfectly accurate statement of the law, whatever interpretation is to be placed on the judgments in the Court of Appeal in New York Life Insurance Co. v. Public Trustee,⁽⁹⁾ to which I now turn.

In that case all the three members of the court pointed out that, strictly, a debt can only be sued upon in the place where it is payable, and although no doubt in a proper case the creditor may have a right to sue the debtor in another place, such right is to sue not for debt but for breach of contract for the failure to pay the debt in the due place of payment; the conclusion would seem to follow that the debt is situate where the debt is payable.

On the other hand, Mr. Buckley submits that when properly understood, the Court of Appeal decided that the place of payment becomes relevant to the question of situs only when it is established that the debtor has two or more residences, and certainly some passages in the judgments of the judges who formed the court support that view.

In my judgment, in this court the matter is concluded by he unreported case in the court of Appeal already referred to, namely, Deutsche Bank and Disconto Gesellschaft v. Banque des Marchands de Moscou.⁽¹⁰⁾ A transcript of the judgments has been made available to me. I have sent for the pleadings in that case, and it is clear that the plaintiffs were assignees of a bank (the Deutsche Bank), whose principal office was in Berlin, but who had a branch in England. The defendant, a Russian bank with no branch in England, was indebted to the London branch of the Deutsche Bank on current account and, therefore, in accordance with the general rule of banking law the debt was payable in London. It is clear that there was no express term of any contract making the debt payable in London. The point now under discussion was not dealt with by Scrutton L. J., but Greer L.J. formulated a number of propositions, among them these: "(4) On January 10, 1920, the Treaty of Peace Order in Council came into operation whereby enemy choses in action having a situs in this country become vested in the Custodian, afterwards called the Administrator, of German property. (5) At this time the bank had no residence in this country, but the debt was payable in this country. (6) The debt in question, therefore, did not pass to the administrator, residence of the debtor being an essential element in deciding the situs of the debt. "

Later on he said: "With regard to the propositions numbered (4)(5) and (6). At the date when the Treaty of Peace Order in Council came into operation, namely, January 10, 1920, the defendants had no place of business in, and were therefore not resident in, the United Kingdom, and I think it is established by the decision in this court in New York Life Insurance Co. v. Public Trustee⁽¹¹⁾ that the debt had no situs in this country. I regard that case as establishing that it is an essential element in determining the situs of a debt due to a foreign corporation that at the material date the corporation should have a residence within the jurisdiction in which the debt is payable. "

Romer L. J., after discussing the New York Life Insurance Company's case, said this: "As the debt in question was, in terms of the contract creating it, payable in this country, and in addition was recoverable here, its locality was held to be English. In the present case the debt is payable in this country, but the defendant bank was not residing here on January 10, 1920. It was in May of the same year, but that will not help the plaintiffs. The debt was also recoverable here on January 10, 1920, had the plaintiffs been successful in obtaining leave to serve the defendant bank out of the jurisdiction. But I know of no authority for the proposition that a simple contract debt is situate in this country at a time when the debtor is not resident here; namely, because he can be sued by putting into operation the provisions of Order XI. "

It is true that in that case the decision of the court was ultimately of no effect upon this point for it was found upon further evidence that the defendant bank had no existence at the relevant time, but it is clear that the majority of the court intended to lay down finally their views upon the law "de bene esse" in the words of Greer L.J. in case upon further inquiry the bank was found to be in existence. Therefore I do not think I can treat the observations of Greer L.J. and Romer L. J. as obiter dicta, and the case is binding upon me if applicable to the present circumstances. It seems to me that the only distiniction that can be drawn between that case and this is that in this case the debt is payable in London by the terms of the contract and not by virtue of the general law applicable thereto and that circumstance is indeed strongly relied upon by the claimants. In my judgment, however, that forms no proper ground of distinction, for the law must be the same whether the debt is payable in a particular place by virtue of the express terms of the contract or by general law applicable thereto. Nor can I accept the argument that, as on one construction of section 8 of the Act there is no appeal from my decision, I am at liberty to disregard a well-settled canon of procedural law, that decisions of the court of Appeal are binding on this court. Accordingly, in my opinion, the locality of the debt in this case is Germany, the only place where the debtor resides. ".

(1) [1956] Ch. 323, 342-4

(8) [1934] Ch. 720, 738

(9) [1924] 2 Ch. 101; 40 T.L.R. 430

(10) Cited in [1954] 1 W.L.R. 1108; reported on a point of practice (1931-1932) 107 L.J.K.B. 386

(11) [1924] 2 Ch. 101