Commissioner of Inland Revenue Hong Kong v. Registrar of Companies

HCMP940/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS No. 940 OF 1997

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Coram: Hon. Madam Justice Yuen in Chambers

Date of hearing: 10 February 1998

Date of handing down: 17 February 1998

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D E C I S I O N

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Summons

1. This is an application by the Liquidator of Intel-Wide Investment Limited ("the Company") to set aside an order made by the Hon. P. Chan, J. (as he then was) on 21 April 1997 under s.290 (1) of the Companies Ordinance ("the Order") whereby he declared the dissolution of the Company to be void and made consequential orders.

2.The statutory final meeting of the Company had been held on 1 July 1995, and the Company had been deemed dissolved on 11 October 1995 pursuant to s.239(4) Companies Ordinance.

3. By an Originating Motion filed on 27 March 1997 and served only on the Registrar of Companies, the Commissioner of Inland Revenue ("the Commissioner") applied to revive the Company so that he could raise an Additional Assessment against it under s.60 Inland Revenue Ordinance, Cap.112 for the year 1993/1994.

Issues

4. The issues are:-

(1) Do I have jurisdiction to set aside the Order?

(2) Was the Order made ex parte, in that the Liquidator should have been given notice of the Motion?

(3) Should the Order be set aside on the grounds that:

(a) the Commissioner was not "a person ... interested" under s.290?

(b) the granting of the order was an exercise in futility since the order could serve no useful purpose?

(c) in the light of the information disclosed by the Liquidator in his Affirmation and full argument inter partes, an order should not have been made in the exercise of the Court's discretion under s.290?

(1) Jurisdiction to set aside the Order

5. The first matter that arises for consideration is whether I have jurisdiction to set aside the Order. The Liquidator's Summons was issued under Order 32 Rule 6 of the Rules of the High Court, which gives the Court jurisdiction to set aside ex parte orders made in Chambers. The Order was however made in Court.

6. I am satisfied that this Court has an inherent jurisdiction to set aside any orders which have been obtained in contravention of Order 8 rule 2, which provides that except where an application by motion may properly be made ex parte, no motion shall be made without previous notice to the parties affected thereby.

(2) Liquidator should have been given notice of Motion

7. The issue then arising is whether the application by motion was properly made without notice to the Liquidator. Mr. Westbrook for the Commissioner submitted that s.290 does not expressly provide that the Liquidator had to be made a party to an application.

8. He referred to In re Belmont & Co. Ltd. [1952] 1 Ch 10 and In re Test Holdings (Clifton) Ltd. [1970] 1 Ch 285, both applications under s.352 Companies Act, 1948 (the equivalent of s.290). In Belmont, the applicant was the Commissioner of Inland Revenue, and only the Attorney General was represented. In Test Holdings, the only parties were the creditor and the Registrar of Companies. He also submitted that the Liquidator was functus.

9. In my judgment, the Liquidator should have been given notice of the Motion. Section 290 contemplates that the liquidator would be the most likely applicant for an order under that section, but even where the applicant is another person, the liquidator is directly affected by it since his office, with its attendant rights and obligations, revives with the revival of the company.

10. Both Belmont and Test Holdings were cases where the companies were struck off the register under s.353 Companies Act. As such, there would have been no winding-up process and no liquidator whom the applicant could serve with notice of the application.

11. The situation is quite different here, where there has been a winding-up process and a liquidator, who in my judgment should have been served. I am fortified in my view by the fact that in the two other cases that were cited to me by Mr. Westbrook (In re Spottiswode, Dixon & Hunting ltd. [1912] 1 Ch 410, 412 and Commonwealth of Australia v. O'Reilly [1984] 8 ACLR 804), the liquidators were served with the applications. Further in Re Forte's Manufacturing Ltd., Stanhope Pension Trust Ltd v. Registrar of Companies [1994] BCC 84, a case referred to in Re Oakleague Ltd. [1995] BCC 921, Hoffmann LJ (as he then was), giving the judgment of the Court of Appeal, observed that the registrar of companies and the former liquidator are normally the only respondents to an application under s.651 of the Companies Act 1985 (similar to s.290 of the Companies Ordinance).

12. In proceeding without notice to the Liquidator as a party affected by the Motion, the Commissioner has failed to comply with Order 8 rule 2, and the Order can therefore be set aside.

(3) (a) The Commissioner was an "interested" person under s.290

13. Section 290 provides that the application may be made by "the liquidator of the company or by any other person who appears to the court to be interested".

14. Insofar as this is a "stand-alone" locus point (and it would appear that Mr. Barlow, appearing for the Liquidator, is not taking the point as such), I am of the view that the Commissioner, who claims to be a creditor under the Additional Assessment raised on the revived Company, is a person who is sufficiently interested in the revival of the Company to make the application.

(3) (b) Not an exercise in futility

15. Mr. Barlow submitted that the Company should not have been revived because it would be futile to do so. The Company had already distributed all its assets, and it is well-established law that properly distributed assets cannot be recovered.

16. Mr. Westbrook submitted however that there is at least an arguable case that the Company could (after revival) recover certain amounts of money distributed to its shareholders under s.79M of the Companies Ordinance, and might even have causes of action in misfeasance against its directors and liquidator under s.276.

17. His submission is based on the following circumstances. In 1994, the Company made two distributions of dividends (in the form of allocation of flats rather than in cash) to the total value of $38.4m. These dividends were distributed before the Company made its return to the Commissioner in 1995.

18. He says that the shareholders/directors knew or ought to have known that the $38.4m. worth of assets (or at least some of it) were not profits available for distribution, because they knew or ought to have known that the property being redeveloped was a current asset ab initio (and, as such, the Company would be liable to pay more profits tax).

19. He obtains support from the decision of the Inland Revenue Board of Review in B/R No.204 of 1996, dismissing the appeal of a company called Super Faith Development Ltd ("Super Faith"). The relevance of this decision arises in this way. The Company owned No. 34 Ko Shing Street and Super Faith owned No. 36. The shareholders were identical. The redevelopment was of both properties. An assessment was raised on Super Faith on the basis that its property was a current asset ab initio. Super Faith appealed. The Board of Review found that Super Faith failed to discharge its burden under s.68(4) of the Inland Revenue Ordinance of proving that it had acquired No.36 for the purpose of long-term investment. So (Mr. Westbrook submits) the shareholders of the Company would also have been aware that No.34 was also a current asset ab initio, and the $38.4m. assets (or part thereof) should not have been available profits for distribution as dividends.

20. Mr. Westbrook says that there might also be a cause of action against the Liquidator for his failure to recover part of the distributed assets before winding up the Company.

21. Mr. Barlow says that the available evidence does not show that there was a breach of s.79M. Even though the Company had made the distributions in 1994, it had still paid profits tax in the sum of more than $14m. in 1995 [p.84], presumably raised by the shareholders. That was not consistent with an intention to avoid paying tax. There were no grounds for alleging misfeasance against the directors or the Liquidator because until the Commissioner raised another assessment, there was no debt.

22. I think the decision of the Board of Review in Super Faith is just enough to make Mr. Westbrook's case arguable. I am aware that the burden of proof in that case was on the taxpayer, and the burden of proof here is on the Commissioner. Nevertheless, the possibility of an infringement of s.79M cannot be said to be non-existent.

23. At the time of the distribution in 1994, the Company had not yet sent its return to the Commissioner. It could not have known then whether the Commissioner would accept the assessment on the basis proposed by the Company. As for the contention that notwithstanding the distributions, the Company still managed to pay $14m. in profits tax the following year, there is no evidence of the arrangements made to pay the tax.

24. It is not appropriate for me here to consider the strength or weakness of a case for recovery of the distributed assets under s.79M. In Re Oakleague Ltd [1985] BCC 921, Robert Walker, J. articulated the attitude of the Companies Court that provided that the application for restoration falls within the general legislative purpose of s.651 Companies Act as described in Stanhope Pension Trust supra., the company will be restored, and whether the restoration does anyone any good or not is a matter to be decided by another tribunal in the future.

(3) (c) Exercise of discretion in light of the Liquidator's Affirmation

25. That however is not the end of the matter, because the revival of a company requires the exercise of the Court's discretion under s.290. In the light of the information contained in the Liquidator's Affirmation, which was not before P. Chan. J., and in the light of the arguments now presented inter partes, should I exercise my discretion in favour of reviving the Company?

26. In my judgment, the answer has to be "No". As the Liquidator's Affirmation shows, the Commissioner was specifically informed of the Company's intention to wind up [p.127], and all the statutory notices were gazetted. The Commissioner did not put in a claim and did not attend the final meeting, and the legal position was therefore that the Company was wound up on the basis that the Commissioner had no claim (actual or contingent) against it. No explanation has been forthcoming from the Commissioner for his choice of action (or perhaps, inaction).

27. If the Commissioner had considered that further profits tax might be payable by the Company, he could have raised an estimated assessment under s.59(2)(b) of the Inland Revenue Ordinance and put in a claim. He did not do so, and he has not explained why.

28. I have taken into account the fact that the Revenue's original assessment was subject to Code 04 (which states that the assessment was raised subject to his examination of the accounts) [p.84, 86]. I have also taken into account the letter from the Revenue dated 26 June 1995 [p.130], which states that "there is no outstanding Profits Tax liabilities at this stage, pending the finalization of the matter on the assessability of the surplus on revaluation on disposal of investment properties".

29. However the position in law remains that unless and until there was another assessment raised by the Commissioner, and a claim lodged by him, there was no claim in the winding-up.

30. If the Commissioner had needed further time to put in a claim (actual or contingent), he could have asked for an extension of time under Rule 208 of the Winding-Up Rules. Even at the stage of the final meeting, he could have asked the Court under s.239(4) of the Companies Ordinance to defer the dissolution of the Company. Again there is no explanation for his inaction (cf. the steps taken by the tax authorities in Commissioner of Australia v. O'Reilly [1984] 8 ACLR 804 in raising assessments and stating their position at the companies' meetings).

31. In my judgment, a creditor who has chosen not to assert his claim in accordance with the statutory winding-up process and who later seeks a revival order from the Court, must give some explanation as to why he did not comply with the statutory procedure before the Court can exercise its discretion in his favour. Mr. Westbrook has referred me to In re Spottiswode, Dixon & Hunting Ltd. [1912] 1 Ch 410, but the circumstances there were rather unusual. That was a reconstruction case, where the applicant never received notice of the dissolution of the old company. Even if notice had been received, the judge found on the facts that the applicant would not have known of the agreement that the assets involving liability to the applicant would not be taken over by the new company.

32. The Commissioner has also failed to explain the delay of one year between his completion of examination of the Company's accounts in March 1996 and the application by Motion in March 1997. There was no information as to when the higher assessment was raised on Super Faith.

33. Further in exercising my discretion under s.290 in favour of the Company, I accept the Liquidator's assertion that the Company will suffer prejudice as a result of the destruction of its books and records [Yam, paragraph 15]. Mr. Westbrook has implied that there is something sinister in the Company's resolution to destroy the books at the expiration of 3 months from the dissolution [p.19]. That is not necessarily so: as far as the Company was concerned, the Commissioner had not raised another assessment, had not made a claim in the winding-up and was apparently content to let the winding-up take its course. By the time the 3 months expired (11 October 1995), the Commissioner had still not raised the Additional Assessment (the first Additional Assessment, subsequently aborted, was not raised until 22 March 1996) [p.145].

34. In the result, I set aside the Order and I make an order nisi that the costs of the Summons and of the hearing be borne by the Commissioner.

Representation:

Mr. B. Barlow (instructed by Yam & Co.) for the Liquidator

Mr. S. Westbrook (instructed by Secretary for Justice) for the Commissioner of Inland Revenue

Mr. SK Lo for the Registrar of Companies