World Magnate Shipping Ltd v. The Collector of Stamp Revenue
Read the full judgment text of DCSA 1/1968 on BabelCite. This District Court judgment was delivered on 3 February 1969.
1. Counsel for the appellant placed the main weight of his argument against the assessment on the ground that the 'Deed of Covenants' was not a bond as generally understood and consequently not assessable under Head 14 of the Schedule to the Stamp Ordinance.
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DCSA000001/1968 IN THE SUPREME COURT OF HONG KONG APPELLATE JURISDICTION STAMP APPEAL NO. 1 OF 1968 -----------------
Coram: Hogan C.J., Rigby J. and Morley-John J. Date of Judgment: 3 February 1969 ----------------- JUDGMENT ----------------- Hogan C.J.: The facts of this case and the manner in which it reaches the Full Court are set out in the judgment of Rigby J. and I would not propose to repeat them. 1. Counsel for the appellant placed the main weight of his argument against the assessment on the ground that the 'Deed of Covenants' was not a bond as generally understood and consequently not assessable under Head 14 of the Schedule to the Stamp Ordinance. 2. He referred to the definition or description of a bond in Halsbury's Laws of England(1) which says:-
3. The deed under discussion did not correspond to that description, counsel said, because (a) it did not promise to pay a sum certain, (b) it was primarily concerned with matters ancillary to the mortgage of the ship, such as the maintenance of the ship, application of insurance monies, etc., and (c) it was executed by other parties in addition to the obligor. 4. He referred us to Loggins v. Titheton(2) for the proposition that the sum must be certain and to Butterworth's Encyclopaedia of Forms and Precedents(3) p.479 ct seq., for the proposition that a bond is usually given by one party only in contrast with a covenant which is generally contained in an inter partes deed. The commentary also states that the differences between them are formal although in a covenant the obligation intended to be performed is normally stated directly whilst in a bond it is usually stated in the conditions. Counsel stressed that in the numerous precedents beginning at p.491 none was to be executed by more than one side. 5. For the purpose of indicating the limits on interest recoverable under a bond, counsel referred to the cases of Hogan v. Page(4), In re Dixon(5), Foster v. Weston(6) and Walters v. Meredith(7). To these, counsel for the respondent added Hughes v. Wynne(8). It seems to me however that these cases afford little assistance on the issue before us as they turn rather on whether the intent of the parties was to make interest payable, whether it is recoverable as damages and whether the principal and interest can exceed the amount of the penalty. They certainly do not indicate that a bond cannot include a promise to pay interest. Barough v. White(9) shows that a promissory note could do so at common law. 6. In the present instance, the parties were not satisfied with the statutory ship's mortgage and, presumably because of the limitations as to form and content prescribed by statute (the United Kingdom Merchant Shipping Acts 1894-1960), they decided to execute this additional instrument on the same day as the statutory mortgage. It included not only a number of subsidiary or ancillary matters relating to the maintenance and protection of the ship, the subject of the mortgage, but also set out at considerable length additional promises and obligations required by the mortgagee for the purpose of under-pinning or strengthening the obligations flowing from the statutory mortgage. They included a series of promissory notes executed by the mortgagor to cover the instalments by which the principal was repayable. The payment of these notes was guaranteed by Mr. John L. Marden and World Wide (Shipping), Ltd. Four of the promissory notes were in addition guaranteed by the Hong Kong and Shanghai Banking Corporation. These guarantees are set out in separate letters but the agreement to provide these guarantees and the letters themselves are all set out in the Deed of Covenants. 7. The Deed contained the following recital:
It went on to say at a later point:
The covenants, terms, etc. included an obligation to pay, inter alia, a fixed or prescribed sum of money. Consequently, it seems to me the Deed did contain a promise by the shipowner to pay a sum certain in money and that this promise under seal is, for the purpose of the Stamp Ordinance, a bond. The Deed also contained many other things, including covenants by the mortgagees or shipbuilders but I think these are immaterial. Stamp duty cannot be avoided merely by including additional matter in the same instrument. See Monroe's Stamp Duties(10) and section 9(1) of the Stamp Ordinance which reads as follows:
The additional provisions do not prevent the document executed by the shipowner or obligor from being a bond on its part for the purposes of the Stamp Ordinance and, consequently, a promise which, unless there is some other reason for exemption, attracts an obligation for payment of stamp duty under Head 14. 8. The next argument advanced by counsel for the appellant seems to me to present greater difficulties for the respondent. It rested on section 40(4)(a) of the Stamp Ordinance, which reads as follows:-
9. The argument is that since the mortgage of the ship is exempt from duty then a document which merely provides for matters ancillary and incidental to that mortgage is covered by the exemption. 10. In support of this contention counsel for the appellant referred to Limmer Asphalte Paving Co., Ltd. v. Commissioners of Inland Revenue(11) where Martin, B., delivering the judgment of the court on an earlier statute, said:
11. During the course of the argument, reference was also made to the pronouncement by Finlay, J. in Prudential Assurance Co. v. Inland Revenue Commissioners(12):
This passage has been very widely quoted but I must confess to some reservations about part of it. One can, of course, say that it is instruments that are stamped, in the sense that unless there is an instrument then there is nothing to stamp, but whether the instrument in question should attract stamp duty or not depends on the transaction contained in it. Consequently, it is the transaction which determines whether stamp duty is payable and what the amount will be. 12. The Crown, however, was also disposed to rely on the dictum of Finlay, J. and to say that as there are two separate and distinct instruments here, the statutory mortgage and the Deed of Covenants, only the mortgage attracts the exemption and the Deed, a separate and distinct instrument, cannot benefit from that exemption. 13. Whilst I find unattractive the argument based merely on the existence of two separate physical objects, the statutory exemption is drawn in narrow terms and and is confined to the sale, transfer or other disposition of the ship. The question whether that expression "sale, transfer or other disposition" is confined merely to the disposal of the ship and inapt to cover any additional matter is certainly high lighted when, as in the present case, there is a separate and distinct instrument embodying not only a freshly stated promise to pay, made under seal, but the same instrument provides for additional guarantees and promises in the shape of promissory notes and two separate letters of guarantee by other parties. True these letters of guarantee are provided by separate documents and the Deed of Covenants is not signed by these guarantors. Nevertheless, the Deed of Covenants embodies an undertaking by the mortgagor of the ship to provide these additional promises and securities and does add something over and above the security given to the shipbuilder or mortgagee by the mere disposition of the ship. The general effect of the document seems to me to bring it within the principle which led to the decision in the Deddington Steamship Co., Ltd. v. Commissioners of Inland Revenue(13) where the company issued a debenture bond for £1,000 and interest. It purported to create a charge upon ships. The ships had previously been mortgaged by a legal mortgage registered under the Merchant Shipping Acts. It was held that the debenture bond did not create any charge on the ship beyond that already in existence and that if it did create any charge its substantial object was to create not a charge but a marketable security, and it was, therefore, not an instrument for the disposition of a ship within Clause 2 of the general exemptions. Consequently, it was held to be liable to stamp duty as a marketable security. 14. Similarly, in the present case, the Deed of Covenants, in so far as the ship itself was concerned, did no more to dispose of the ship than had been done by the statutory mortgage but did contain additional obligations by the shipowner which lay outside the boundaries of the exemption conferred by section 40(4)(a). 15. There remains the third of the arguments by the appellant - the contention that the Deed falls under head 37(2) of the Schedule to the Stamp Ordinance which reads as follows:
16. Counsel contends that the appellant could benefit from this provision because the statutory mortgage being exempt had been duly stamped and the Deed of Covenants was only a collateral security. Sub-head (1) of item 37 reads as follows:
17. Had head 37(2) merely said "duly stamped" instead of saying as it does "duly stamped under sub-head(1)", the matter might well have been covered in favour of the appellant by Lord Morris of Borth-y-Gest's judgment in the House of Lords in the case of Inland Revenue Commissioners v. Henry Ansbacher & Co.(14), where he held that the words "duly stamped" could be satisfied if the document in question had borne the correct amount of stamp duty or if it was exempt from stamp duty; but where, as in the present case, the expression is duly stamped under a particular sub-head it seems to me that the interpretation favoured by Lord Morris of Borth-y-Gest is excluded, because it would be straining the meaning of 'language' excessively if one were to hold that a document which had borne no duty was, nevertheless, duly stamped under a specific sub-head which required duty to be paid. It might well be held 'duly stamped' under the provisions of the Ordinance as a whole but, when no stamp duty had been paid, it was not duly stamped under sub-head (1) of item 37. 18. I would dismiss the appeal with costs. Representation: Gittins, Q.C. (Deacons) for the Appellant. E. Thistlethwaite, c.c. for the Respondent. Separate Judgment delivered. (1) 3rd Edition, Volume 3 p.329. (2) 80 E.R. 147. (3) 3rd Edition, Volume 2 (4) 1 B. & P. 337. (5) 1900 (2) Ch. D. 561. (6) 6 Bing. 709. (7) 3 Y. & C. Ex. 264. (8) 1 My. & K. 20. (9) 4 B. & C. 325. (10) 4th Edition p.26. (11) (1872) 7 Ex. 211 (12) 1935 (1) K.B.D. 101 at 106 (13) 1911 (2) K.B.D. 1001. (14) 1963 A.C. 191
----------------- Coram: Hon. C.J., Rigby, S.P.J. & Morley-John, J. Date of Judgment: 3 February 1969 ----------------- JUDGMENT ----------------- Rigby, S.P.J.: 19. The Appellants, being aggrieved by an assessment of the Collector of Stamp Revenue, appeals against that decision by virtue of Section 18(1) of the Stamp Ordinance. That section provides for such appeals to be heard in the District Court and, indeed, the appeal was, in fact, lodged in that court. The machinery by which the appeal finds its way to the Full Court is, perhaps, of some interest. Section 10(2) of the District Court (Civil Jurisdiction and Procedure) Ordinance (Cap.336) provides that a District Court judge may, of his own motion, transfer to the Supreme Court any action or matter which, inter alia, in his opinion might more conveniently be heard and determined in the Supreme Court. Upon an application made by the Appellants' solicitors, with the concurrence of the Collector, the District Court judge seized with the matter made an order under the section transferring the case to the Supreme Court. Section 28 of the Supreme Court Ordinance (Cap.4) enables the Chief Justice to direct that any action or other proceeding whatsoever in the Supreme Court may, in the first instance, be heard before the Full Court without the necessity of being first tried and determined by a Supreme Court judge sitting alone. It was, and is, said that these proceedings involve a matter of some practical importance upon which, with the exception of one judgment given in the District Court in 1961*, there is a dearth of authority. In those circumstances upon an application being made to him by the Appellants' solicitors the Chief Justice, under S.28 in the Supreme Court Ordinance, directed that the proceedings be transferred from the Supreme Court to the Full Court. The matter now comes before us for our determination upon the issues raised. 2. The facts giving rise to the appeal are fully set out in the "Case Stated" by the Collector; they may be fairly briefly summarised. 20. The Appellants, World Magnate Shipping Ltd., a corporation duly organized and existing under the laws of Hong Kong with its registered office in Hong Kong, entered into a written agreement, dated the 15th of February, 1965, to purchase a ship to be built and delivered to them by a Japanese firm, to whom I will hereinafter refer as "the vendors". On the 21st of July, 1966, the Appellants executed a mortgage of the ship in favour of the vendors to secure the sum of US$4,604,800.00 with interest thereon, that sum being in fact the balance of the purchase price in the said ship. Under the U.K. Merchant Shipping Acts 1894-1960 - the greater part of the provisions of which are applicable to Hong Kong - the mortgage of a registered ship requires to be in a statutory form before it can, or will, be accepted for registration by the Registrar of Shipping. Furthermore, under S.40(4)(a) of the Stamp Ordinance - which, in this respect, follows the U.K. Stamp Act, 1891, - the mortgage of a ship is specifically exempted from stamp duty. 21. On the same day as the Statutory Mortgage was executed, namely, the 21st of July, 1966, the Appellants executed a Deed of Covenants in favour of the vendors. That Deed recited, inter alia, :-
3. The said Deed of Covenants further provided that the Mortgage "shall along with this Deed be held by the Mortgagee, forever upon the terms, therein and herein respectively set forth for the enforcement of the payment of the principal and interest on said indebtedness and the Notes according to their tenor and the payment of all such other sums as may hereafter become secured by this Deed in accordance with the terms hereof and to secure the performance and observance of and compliance with the respective covenants, terms and conditions in the Mortgage, this Deed and in the Notes contained, expressed or implied." 22. The Deed then went on to make provision for such matters as due payment of ship's dues, maintenance in good running order; right of inspection by mortgagees, prohibition against change of flag, prohibition against sale, pledge, or further mortgage, insurance, requisition by any governmental authority, and a wide variety of such matters as one might reasonably expect to find in such a document given as a collateral Deed of Covenants relating to the mortgage of a ship. 23. On the 14th September the Deed was presented by the Appellants' solicitors to the Collector under S.17 of the Stamp Ordinance for the expression of his opinion as to whether or not the Deed was chargeable with stamp duty and, if so, with what amount it was chargeable. 24. On the 17th September, the Collector, being of the opinion that the document was a Bond to secure the payment or repayment of money within the meaning of Head 16 (now14) of the Stamp Ordinance and therefore chargeable with duty under that Head, assessed the duty, on the basis of 20 cents per hundred on US$4,604,800.00 as HK$53,415.80. 25. The issue now before this court is :-
4. The Appellants' arguments are relatively simple and straightforward. The mortgage of a ship is required by law to be in a prescribed form. It is a relatively short, simple form and it cannot, and does not, provide for all the additional stipulations that are, of necessity, required as supplementing the mortgage and which deal with the management, supervision, insurance, etc. of the ship whilst the mortgage remains in existence. A collateral document is, therefore, required to be entered into by the mortgagee covering all these essential matters; that is the Deed of Covenants. The Mortgage and the Deed of Covenants are, therefore, in effect one document relating to the same transaction, namely, the mortgage of the ship. The statutory Mortgage of the ship being itself exempt from stamp duty, it necessarily and logically follows that the Deed of Covenants must also be exempt from stamp duty. 26. Alternatively, the Appellants contend that the Deed of Covenants not being, as they contend, a Bond, the document is at most a collateral and additional security and, as such, is chargeable under (now) Head 37(2) with ad valorem duty of 10 cents per hundred dollars up to a maximum duty of $20. 27. Finally, and in the last alternative, if the document does not come within Head 37(2) it is caught for duty purposes under the general Head 23 which provides that any "deed of any kind whatsoever not described in the Schedule" shall be chargeable with stamp duty of $20 on the document. 5. The first ground raised by Mr. Gittins, counsel for the Appellants, is that the Deed of Covenants is not a Bond within the legal meaning of that expression. The essential pre-requisite of a Bond is that the obligor binds himself to another for the payment of a specified sum of money either immediately or at a fixed future date. 28. It is said by Mr. Gittins that this Deed of Covenants charges nothing; that the real security is the ship itself, that the Promissory Notes are secured by the Mortgage of the ship itself and that the primary, if not sole, purpose of a Deed of Covenants is to provide for those matters necessary and incidental to the maintenance, insurance, and proper management of the ship during the subsistence of the mortgage. I must confess that at first I was impressed by that argument; indeed, if in fact that had been the primary, or sole, purpose of the Deed of Covenants, I assume that it would not have been chargeable with stamp duty. But, although undoubtedly the numerous covenants relating to the control and management of the ship during the subsistence of the Mortgage form an important and essential part of the Deed, the document itself, after reciting and referring to the fact of the mortgage, the issue of the promissory notes, the respective guarantees given by Mr. J.L. Marden and the Hong Kong and Shanghai Banking Corporation, expressly continues - in Clause 6 - to state that "the ship owner (i.e. the Appellants) in order to secure the payment of said indebtedness and the Notes and interest thereon, together with such other sums as may become due and payable under this Deed ....... has agreed to and duly authorized the execution and delivery of this Deed and a First Preferred Statutory Ship Mortgage over the Vessel ...... has been duly executed by the Shipper in favour of the Mortgagee concurrently with the execution of this Deed." 29. In the formal part of the Deed the document then states that the Mortgage "shall along with this Deed be held by the Mortgagee forever upon the terms, therein and herein respectively set forth for the enforcement of the payment of the principal and interest on said indebtedness and the Notes according to their tenor ......" 30. As Finlay, J. said in the oft-quoted case of Prudential Assurance Co. Ltd. v. I.R.C.(1):
I would respectfully agree with the comment made during the course of the argument before us by the President of this court that the principle enunciated in the passage quoted might have been more clearly put by saying that one stamps "the transaction reflected in the instrument". But looking at that instrument it seems to me that the Commissioner of Inland Revenue was right in his conclusion that the primary object of this Deed - and the object clearly reflected and expressly recited in the document itself - was to secure the repayment of money. The fact that the money itself was repayable by individual Promissory Notes, each bearing interest until the date of maturity of each note, does not, in my view, in any way detract from the fact that it was a payment of a specified sum of money; the interest thereon was at all times fixed and capable of calculation at any moment with complete accuracy. It was a Bond for the repayment of a sum certain. Unusual though it may be for it to do so, the case of Barough v. White(2) would seem to be adequate authority for the fact that a promissory note may be made payable with interest. Nor, with respect to Mr. Gittins, do I think that there is any substance in his argument that a further essential pre-requisite of a Bond is that it should bind only the obligor. It is true that there are in the Bond covenants entered into by the Mortgagee but those covenants are of a relatively subsidiary nature in relation to matters incidental to the management and running of the ship during the subsistence of the Mortgage, whereas all the covenants of overriding importance relating to the repayment of the debt are those binding upon the Appellants as obligor for the due repayment of that debt. I am, therefore, of the opinion that the Collector of Inland Revenue was right in his assessment of the Bond as chargeable with stamp duty under Head 14. 6. That is really the end of the matter. But it is, I think, of some interest to consider the argument as to whether or not the Deed of Covenants was a collateral security under Head 37(2) of the Schedule and therefore chargeable simply with a maximum stamp duty of $20.
It is conceded by the Collector that the principal security - the Statutory Ship Mortgage - was exempt from duty under S.40(4)(a) and that it was, therefore, duly stamped as exempt from stamp duty. But the Collector places reliance upon the concluding words of Head 37(2), to wit, "duly stamped under sub-head 1." and contends that the principal security was not duly stamped under sub-head 1 because it never bore the ad valorem stamp duty required under that heading. In answer to that contention Mr. Gittins sought to rely upon a passage in the speech of Lord Morris of Borth-y-Gest delivering the principal judgment in the House of Lords in the case of Inland Revenue Commissioners v. Henry Ansbacher & Co.(3) that "a security may be 'duly stamped' within the meaning of these words either if it has actually borne the correct amount of stamp duty that it attracts or if it is exempt from stamp duty". I think, however, that that case can be readily distinguished upon two grounds, first, that the corresponding English Act, unlike our Ordinance, contains no distinct definition of the expression "duly stamped". Secondly, and of more importance, the charge heading making reference to a collateral security which it was there sought to charge with stamp duty made no reference to the fact that the primary security was chargeable with stamp duty. In that case, the primary security being itself exempt from stamp duty and "duly stamped", their Lordships held that the collateral security was therefore also exempt from stamp duty. It is of interest to observe that the immediate reaction of the taxing authorities to that judgment was to cause the law to be amended by the passing of Section 63 of the Finance Act 1963. That section provided that in determining whether an instrument is the only, principal or primary security for the payment or repayment of money within the meaning of paragraph 1 of the heading "Mortgage, Bond, Debenture, Covenant and Warrant of Attorney" in that Schedule, "no account shall be taken of any other instrument which is a security for the same annuity, sum or sums, or for the same payment or repayment, as the case may be, or for any part thereof, unless that other instrument is chargeable with stamp duty under either of the said paragraphs and is duly stamped." The purpose of the amendment was, of course, deliberately to nullify the effect of the decision in the Ansbacher(3) case. 31. However, in the present case it is contended on behalf of the Collector that, unlike the English Act, the concluding words of sub-head 2 of Head 37 expressly provides that in order to bring the collateral security within that sub-head for stamp duty purposes the principal security must have been "duly stamped under sub-head 1". Sub-head 1 itself provides that the duty on the principal or primary security is "20 cents for every $100 or part thereof the principal sum secured." Since the Statutory Ship Mortgage was not stamped with that ad valorem duty the collateral covenant cannot be brought within sub-head 2 of Head 37 for stamp duty purposes. In my judgment that is a valid argument. 32. For the reasons I have indicated above, I would accordingly dismiss this appeal with costs. Representation: Gittins, Q.C. (Hobson) for Appellants. E. Thistlethwaite, C.C. for Respondent. *Far East Metal Indnstry & Shipping Co. Ltd. and Banque Belge Pour L'Etranger (Extreme Orient) S.A. v. The Collector of Stamp Revenue (1961) D.C.L.R. p.59. (1) (1935) 1 K.B. 101 at 106. (2) (1825) 4 B. & C. 325. (3) (1963) A.C. 191 at 209-210. IN THE SUPREME COURT OF HONG KONG APPELLATE JURISDICTION STAMP APPEAL NO. 1 OF 1968 -----------------
Coram: Hogan C.J., Rigby J. and Morley-John J. Date of Judgment: 3 February 1969 ----------------- JUDGMENT ----------------- Morley-John J. : 33. I concur with the judgment of my learned brothers. |
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