Kwok Chi Leung Karl v. The Commissioner of Estate Duty
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IN THE COURT OF APPEAL 1986, No. 89 BETWEEN
________________________ Coram: Sir Alan Huggins, V.-P., Fuad & Clough, JJ.A. Dates of Hearing: 23rd, 24th, 27th, 28th, & 29th October 1986 and 12th February 1987 Date of Handing Down of Judgment: 27th March 1987 ________________________ JUDGMENT ________________________ Sir Alan Huggins, V.-P.: 1. The dispute between the parties is whether estate duty is payable by the plaintiff Respondent (“the Executor”) by reason of the Testator's having died possessed of rights conferred upon him by a promissory note. The promissory note was in these terms:
2. The Originating Summons was taken out for the determination of the question
That presupposes that there was at the time of the Testator’s death a debt or obligation evidenced by the promissory note. However, it is clear that until the note was presented no money was receivable under it and no action could be brought upon it: there was no debt. Equally there was no obligation imposed on the promisor until the note was duly presented. After presentment a right of action would accrue if the note was not honoured, and that right of action would be a chose in action. Mr. Dicks argues that there was here a contingent debt, the situs of which was the same as that of the future debt: the contingent debt was the asset which had passed to the Executor, and its situs was to be found “by looking at the correlative duty, i.e. the duty to pay the debt in Monrovia upon presentment there” 3. The difficulty arises from the fact that the whole concept of situs is artificial in relation to intangible property. It is only by a legal fiction that a debt or other right is given a situs at all. The situation becomes even more remote from reality where a future debt, which has no present existence as a debt even in law, is in issue. The cases show that where there is a present debt it is to be treated as situated in the place where it is recoverable. Thus in the Attorney General v Bouwens (1838) 4 M. & W. 171, 191 the court said:
In that case the property which was in issue was what were described as foreign “bonds”, which had “been clearly framed with a view to their becoming subjects of sale, and easily transmissible from hand to hand”. They were transferable in England and it was held that they were liable to probate duty. The promissory note in the present case was not saleable in that sense, although the future debt it represented was doubtless capable of assignment. At the time of the Testator's death there was no present debt “evidenced by” the promissory note: the money was not recoverable from the promisor anywhere. It has not been suggested that there was therefore no property which passed upon the death, and it is conceded that such property as did pass must be accorded a situs. 4. The Testator's contingent right to receive money from the promisor at a future date could not, at the time of his death, have been enforced against the promisor. An existing debt could have been so enforced. Both the contingent right and the debt would be assignable, and the Testator could, at least in theory, have obtained value in return for the assignment. Although in both cases, therefore, the right of assignment for value (which could have been exercised wherever the Testator happened to be - and he was in Hong Kong at the time of his death) could be regarded as property having value, in the case of an existing debt the law does not separate that power from the debt itself. In the case of a future debt the right to assign is the only thing which is of any present value to the prospective creditor: by its very nature it stands alone. It is a valuable asset but it is not a debt, nor is there any corresponding obligation evidenced by the promissory note: it is a right evidenced by the promissory note. Accordingly the Originating Summons asks the wrong question: it is neither capable of answer nor, if an answer could be given, would it decide the dispute between the parties. 5. As the matter has been fully argued I would treat the Originating Summons as one seeking declarations (a) as to the nature of any property passing on the death of the Testator by reason of the. existence of the promissory note and (b) as to the situs of that property. The first quest ion I have already answered: we should declare that there passed to the Executor a right to receive in the future and upon presentation of the promissory note in Monrovia the sum of money expressed in the note. 6. The Executor's contention that the situs of a right to receive a future or contingent debt should be regarded as the same as the situs of the debt if and when it does come into existence as a debt produces a result which is simple and tidy but which, in the circumstances of the present case, affront s common sense. If we are driven by authority to accept that contention, so be it. 7. No case has been cited to us which is on all fours with t he present. Perhaps the nearest was Attorney General v Pratt (1874) 9 Exch. 140. That was a case where the testator, an archdeacon about to return from India, had arranged to transfer funds from his bank in India to his bank in England. The transfer was being effected by bills of exchange drawn by the India bank on the English bank: the archdeacon was not a party to them. The archdeacon died in England while the bills were on their way to England. At the time of the death the bills had not yet been accepted, but before an action was brought against the executor for probate duty the bills were accepted and paid. The property of which the archdeacon died possessed was, therefore, a right to be credited, with the proceeds of the bills if and when they were honoured. Kelly, C.B. was of opinion that “the bills or the money they represented were assets subject to probate duty”. The bills themselves he regarded as personalty in respect of which trover might have been maintained by the executor even before they were accepted. Amphlett, B. said that the bills represented, but did not constitute, the assets. All the judge treated the “money, property, or debt represented by” the bills as assets where the debtor resided. The English bank was deemed to be a debtor - although at the time of the death it had not yet accepted the bills - because it had subsequently in fact accepted them and paid them upon their maturity. That bank was resident in London and the money came to hand in London: the assets, therefore, were in London. The case thus turned upon the nature of bills of exchange. Pigott, B. pointed out that, if the bills had not been accepted, a liability would have arisen in the drawer (the Indian bank) but that the court was entitled to assume that the English bank, on which the bills were drawn, had the money of the drawer actually in its hands or by arrangement in account, as proved to be the fact: the money was known to be in England. By analogy it is contended that the money payable under t he promissory not e in t he present case was known to be in Monrovia: moreover, if it was necessary (despite the provisions of the note) to show that the debtor company was resident in Liberia, such residence appeared from the fact that, as required by the Liberian statute law, the company had an address for service in that country: even if, which was contested, the company was also resident in Hong Kong for some purposes, that was immaterial. 8. I myself find difficulty in viewing the property which may be liable to estate duty here as being the money which the company promised to pay at a future date. The company may not, at the date of the Testator's death, have had the money in Liberia or anywhere else. It seems to me that the property which passed on the death was whatever was then represented by the promissory note, namely the Testator's contingent and future rights. As the note was expressed to be non-negotiable, those contingent and future rights were all that existed. They were capable of assignment in Equity and had a market value. Whether they were situated where the Testator was, or where the promissory note representing them was, is perhaps open to argument, but it is an issue which we do not need to decide: the Testator admittedly died in Hong Kong and, although we have no direct evidence as to where the note was at the time of the death, it was executed on 26th April 1983 at 8.45 p.m. in Hong Kong and the Testator died the following day. In the absence of evidence that the note had been sent out of Hong Kong it would be reasonable to presume that it was still here when he died. 9. That, however, was not the main argument of the Commissioner. He contended that, although there was no present debt, the debt when it did arise would be a chose in action and the company which would then be the debtor was, on the evidence, resident only in Hong Kong. Alternatively, he said that, if the company had a residence in Liberia, it was also resident in Hong Kong. He submitted that a company resides where its central management and control is to be found and that, on the evidence, the central management and control of this company was clearly in Hong Kong: moreover, the only business which the company had ever carried out was the transaction relating to the sale of the shares, which was carried out in Hong Kong. I do not think we need to concern ourselves with the debt which would arise when the promissory note was presented: that was not the property which passed on the Testator's death. If I am wrong as to that, then it is necessary to decide whether the company did reside in Hong Kong. The cases relating to the residence of a company for the purpose of a tax on its income appear to me to be irrelevant: we would be concerned with the residence of the company for the purpose of its being sued for the debt and I would have agreed with the trial judge that that was Liberia. 10. Taking the approach I have outlined above, I would allow the appeal and, in addition to the declaration already indicated as to the nature of the property of which the Testator died possessed, would declare that it was property situated in Hong Kong. I would make an order nisi that the parties pay their own costs both here and below. Clough, J.A.: 11. The originating summons which has given rise to this appeal purported to raise the question, for the purposes of section 10(b) of the Estate Duty Ordinance (Cap. III), of the situs of the debt or obligation contained in or evidenced by a non-negotiable promissory note at the date of death of the payee, Mr. Lamson Kwok (“the deceased”) who died on the 27th April 1983. The Commissioner of Estate Duty appeals against the declaration of Jackson-Lipkin J. that at the date of death of the deceased the debt or obligation contained in or evidenced by the promissory note in question constituted property situate outside Hong Kong within the meaning of section 10(b) of the Ordinance. 12. The originating summons was issued by Mr. Karl Kwok (“the respondent”), the son and executer of the deceased in proceedings brought by the respondent against the Commissioner who contended that the promissory note in question was subject to estate duty under section 5 of the Estate Duty Ordinance as property .of the deceased which passed an his death. 13. The single question raised in the originating summons was as follows:-
14. Section 10(b) of the Ordinance provides that estate duty shall not be payable in respect of property outside Hong Kong. In correspondence with the Commissioner before the proceedings began, the respondent’s solicitors contended that the promissory note, or the underlying debt of which it was evidence, came within this exception. The note was one of five notes which had been drawn in the course of a carefully prepared scheme devised to avoid the payment of estate duty on substantial holdings of shares of the deceased. The scheme involved his selling the shares to Tolu Limited (“the company”), a company incorporated in Liberia, under agreements providing for his acceptance of the purchase price in the form of promissory notes drawn by the company and payable on demand in Liberia after 60 days sight. The company is shareholders were the widow and four sons of the deceased and its three directors were his sons. 15. The proceedings and this appeal are concerned only with one of the promissory notes which has been chosen by the respondent as a test case which will govern the other f6ur notes. The note in question came into existence in the following circumstances. 16. On the 26th April 1983 the deceased (who died on the next day), acting by the respondent who held his father's power of attorney, made an Agreement with the company whereby the deceased contracted to sell specified shares belonging to him to the company for (US)$1,807,839.24 to be paid or satisfied in manner manner described in "Paragraph 2" of the Agreement. The latter provision stipulated that in consideration of the sale and transfer of the shares the deceased agreed to accept a promissory note executed by the company in the terms of a form of note exhibited to the Agreement. 17. The promissory note in question was expressed to contain a promise by the company to pay the deceased (US)$1,807,839.24 "On demand after sixty (60) days from the date hereof … in Liberia, for value received, with interest from date at the rate of ten per cent (10%) per annum until payment". The note also contained a stipulation that “Principal and interest, shall be payable at City of Monrovia, Republic of Liberia”. It was dated “26th April 1983 8:45 p.m.” and executed under the hand of a duly authorised director of the company, Mr. Lester Kwok, who is another son of the deceased. 18. It is common ground that section 6(1)(g) of the Ordinance. (which provides that property passing on the death of the deceased shall be deemed to include "debts and sums of money due and owing from persons in Hong Kong to any deceased person at the time of his death on obligation or other specialty, to the same extent as if they were owing to the deceased upon simple contracts without regard to the place where the obligation or specialty shall be at the time of the death of the deceased") does not apply in the present case. 19. Accordingly, in the absence of any attack on the bona fides of the participants in the scheme or any challenge to it made on any other grounds, the determination of the issue raised in the respondent's originating summons, and now on this appeal, is intended to decide whether or not estate duty amounting in the aggregate to about (HK)$5 million is payable on the death of the deceased in respect of the promissory note mentioned in the originating summons and the four other notes which were drawn by the company in similar circumstances. 20. The respondent’s originating summons was supported by his own affidavit. The Commissioner did not seek any order for further discovery regarding the company’s activities or the presentment of or any payment made under the promissory note in Monrovia. No evidence was filed on his behalf. 21. The respondent deposed that the deceased had died in Hong Kong on the 27th April 1983 and that the respondent, as one of the deceased's executors, had on the 24th December 1985 obtained a grant of probate of his will dated the 24th January 1971. His widow and four sons having survived the deceased, the effect of his will is that, after payment of debts and funeral and testamentary expenses including estate duty, the deceased's residuary estate is to be held by his executors upon the usual trusts for conversion, The proceeds are divisible between his widow, who is entitled absolutely to a 3/7th share, and his four sons, each of whom is entitled absolutely to a 1/7th share. 22. The respondent's affidavit exhibited inter alia copies of the correspondence between his solicitors and the Commissioner in which the respective contentions of the parties were advanced before the institution of the proceedings. He deposed that the company had been incorporated in Liberia on the 25th February 1983 and exhibited the Articles of Incorporation and Bye Laws of the company together with documents evidencing relevant transfers of subscriptions and resignations of directors. 23. No expert evidence on Liberian Law was adduced but the respondent exhibited copies of the Liberian Corporation Law of 1948 and of the Liberian Business Corporation Act. The company's Articles expressed the company to have been incorporated pursuant to the Liberian Business Corporation Act. The respondent drew attention in his affidavit to the provisions of section 3.1 of the Act which required the company to appoint a registered agent for service of process in Liberia. He deposed that the company had duly appointed International Trust Company of Liberia (“the agent company”) as its registered agent. The Articles of the company named the agent company as the company’s registered agent and stated the company's registered address in Liberia to be 80 Broad Street. Monrovia, Liberia, which was also the address of the agent company's office. 24. The respondent’s evidence was that the deceased had never been a shareholder or director of the company. He deposed that the entire issued capital of the company consisted of one hundred bearer shares which were held in equal amounts by the deceased's widow and her four sons. He further deposed that on the 28th February 1983 a Mr. Young, who was then the sole shareholder of the company, had appointed the respondent and two of his brothers to be directors of the company. 25. The respondent exhibited copies of the minutes of six meetings held by the directors of the company. The minutes showed that all these board meetings had been held at a hotel in Macau and that they had all been attended only by Mr. Young, as proxy for the respondent, and by a Mr. Cheng Wing Kwong as proxy for the respondent's brother Lester Kwok. The first two meetings held on the 21st and 22nd March respectively were concerned with confirmation of the appointment of the respondent and two of his brothers as directors, with the formalities of the appointment of the agent company and with the transfer and allotment of bearer shares. 26. On the 18th April 1983 the board held its third, fourth and fifth meetings in the evening. The minutes show that at the third meeting the board resolved to open a U.S. dollar account in the company's name with the Shanghai Commercial Bank Limited in San Francisco. At the fourth meeting the board resolved to purchase specified shares of the deceased for specified prices and to issue five promissory notes as consideration for the transaction. The board also resolved to enter into five Agreement for the sale and purchase of the relevant shares from the deceased. At the fifth meeting the board resolved to open a Hong Kong dollar account in the company's name with Wing On Bank Limited in Hong Kong. 27. Subsequent to the deceased's death, at its sixth meeting on the 12th May 1983 the board resolved to open a U.S. dollar current account in the company's name with the Irving Trust Company of New York City. A shroud of obscurity was left by the respondents evidence over the fate of the shares acquired by the company from the deceased and over the manner and extent of the business activities of the company including the operation of its bank accounts by the directors who were the relevant authorised signatories. There was no evidence that the company had any place of business, as distinct from a registered office, in Liberia. 28. In the course of the hearing before the judge, counsel for the Commissioner evidently contended that the central management and control of the company was in Hong Kong. This led to a somewhat enigmatic concession by counsel for the respondent who said in his reply that he would not seek to persuade the court that the central management and control of the company was not in Hong Kong at all material times. There was therefore no evidence before the judge as to the precise locality of the company’s central management and control or as to the nature of the business with which that management and control was concerned. 29. In his judgment the judge set out the facts deposed to in the respondent's affidavit. He then commented that he had no information regarding the whereabouts of any minute book the company might have. He referred to what he called the unchallenged averment by counsel for the Commissioner that the company's seal was in Hong Kong, to there being no record of any meetings other than the above-mentioned six hoard meetings and to the concession by counsel for the respondent regarding the central management and control of the company. He then observed:-
30. There is no reference in the judgment to the question of onus in this case where the respondent was seeking a declaration that the situs of the debt or obligation contained in or evidenced by the promissory note was outside Hong Kong. No point seems to have been taken by the Commissioner, and no point was taken on appeal, that the respondent was seeking to obtain the benefit of a statutory exception or relieving provision and that the onus was therefore upon him to show that the exception applied. The Commissioner did not require the respondent to make any further discovery or to submit to cross-examination. The respondent having adduced only such evidence as he deemed necessary, the effect of the respondent's concession was that the judge was left in the unsatisfactory position that the respondent’s counsel had conceded, in effect, that the central management and control of the company was in Hong Kong but was nevertheless relying on the absence of evidence of any address for service or place of business of the company in Hong Kong. 31. On the evidence before him the judge made an order declaring, in the terms of the originating summons, that at the date of the deceased's death the situs of the debt or obligation contained in or evidenced by the promissory note constituted property situate outside Hong Kong within the meaning of section 10(b) of the Ordinance. He did not reject entirely the Commissioner's argument that the situs of the debt or obligation was where the debtor resided but he did reject his argument that Hong Kong was where the debtor company resided because that was the locality of the central management and control of the company. He preferred the argument advanced on behalf of the respondent and found for him on two alternative grounds which were based on two of several propositions of law which the judge propounded after considering various authorities which had been cited to him. 32. The first ground for his decision appears to have been based on a “recoverability” test on the footing that a chose in action is regarded as situate in the country where it is recoverable, that the promissory note fell into a special class because it was non-negotiable and payable only in Monrovia after 60 days sight on presentment there and that the only place where service on the company could be effected was in Liberia. The test which the judge considered to have been satisfied was referred to by him as “the situs of the instrument” test and Has expressed by him in the following proposition:-
33. In adopting the above test the judge appears to have been influenced by what he regarded as the analogous situation of a debt under an irrevocable letter of credit which the majority of the English Court of Appeal held in Power Curber International Limited v. National Bank of Kuwait S.A.K.[1] to be situate in the place where it is in fact payable against documents. 34. The second ground for the judge's decision was based on the respondent having satisfied what the judge called a “residence” test which he formulated in the following proposition:-
35. Apart from his contemplation of the rather strange additional factor of a corporation having more than one place of residence (one of which was within the jurisdiction) but an address for service only without the jurisdiction, the “residence” test as propounded above seems to have been based on the decision of the English Court of Appeal in New York Life Insurance Company v. Public Trustee[2] and on the decision of Pearson J. in Jabbour v. Custodian of Israel’s Absentee Property[3]. Clearly a foreign company cannot be resident within the jurisdiction in the sense contemplated by those cases unless it has an identifiable place of business at which service can be effected upon it. It seems however that the judge contemplated, wrongly in my view, that the company in the present case was resident in Hong Kong (because it had been conceded that its centre of management and control was in Hong Kong) but that the company had no address for service here. 36. The Commissioner appeals against the judge’s decision on three grounds. He begins by contending that the first ground of the judge's decision, applying the recoverability or “situs of the instrument” test, is wrong in law because the situs of the debt evidenced by or contained in the promissory note is to be determined by the sole residence of the debtor company and not by the place of payment or recoverability. 37. As regards the second ground of the judge’s decision based on the “residence” test, the Commissioner contends that the judge erred in law in holding that the company was resident in Liberia and not solely resident in Hong Kong at the date of death of the deceased. In his third ground of appeal the Commissioner contends that the judge erred in law in holding that an action on the promissory note could not be commenced in Hong Kong other than by obtaining leave to serve such proceedings out of the jurisdiction. 38. The first question to be decided on this appeal concerns the nature of the property which passed on the death of the deceased. It is only when the precise nature of that property has been determined that the appropriate test can he applied to ascertain the locality of the property at the date of the deceased's death. 39. In this connection, I agree with Sir Alan Huggins V.-P. that the originating summons does not identify the actual property which passed on the death of the deceased. Mr. Dicks, who sought on behalf of the respondent to uphold the judge's declaration, acknowledged that an asset did pass. However he contended, rightly in my judgment, that there was no debt due to the deceased, nor did he have a cause of action against the company, at the date of his death. Mr. Feenstra, for the Commissioner, contended that the deceased's right at his death was a contingent future debt which was assignable, although not negotiable. 40. It followed that at the material time there was no debt actually due or corresponding immediate obligation evidenced by the promissory note which was capable of enforcement in any jurisdiction or to which a situs could be allocated. The declaration made by the judge was therefore strictly one which he should not have made because it does not identify the property which passed and cannot therefore give the respondent the relief he sought by his proceedings. That relief was a declaration in terms which would result in the deceased's relevant property which actually passed on his death being entitled to exemption from liability for estate duty. No declaration should have been made if it would not result in the granting of the relief sought. 41. However, I agree with the Vice-President that, as the matter has been fully argued below and on appeal, we should now treat the originating summons as impliedly raising two questions namely (1) as to the nature of the property, if any, evidenced by the promissory note and passing on the deceased's death and (2) as to the situs of that property at the relevant time. 42. As I have observed above, there was no due debt or immediate obligation in existence under the promissory note at the date of the deceased's death. The note carried interest but none was payable before presentment in Monrovia Indeed it could well be that no due debt will ever come into existence. There was no evidence of actual presentment or payment after the deceased’s death. Furthermore the beneficiaries under the deceased’s will who are also the shareholders of the company, are in a position to procure the release of the future debt by the deceased's executors. 43. If no due debt or right to enforce a debt then due passed on the deceased’s death what property, if any, did pass? In my judgment, as Mr. Dicks acknowledged, an asset of the deceased did pass on his death. The asset was the deceased’s then existing contractual right to obtain and if necessary enforce, the payment of the amount specified in the note, with interest, on presentment in Monrovia at any time after the expiration of 60 days from the 26th April 1983. Whether the right is classified as a legal or equitable chose in action or otherwise seems to me not to matter. The right undoubtedly constituted “property” for the purposes of the Estate Duty Ordinance, whatever may be its correct technical classification and 1r!hatever its value. 44. The promissory note was not negotiable. However, applying Hong Kong law in the absence of any evidence regarding Liberian law, the deceased's contractual right under the note represented disposable property at his death. It was assignable by the deceased, wherever he might be in equity and also under section 9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) as a “debt or other legal chose in action” notwithstanding the fact that the debt Has not yet payable: Brice v. Bannister[4]; Buck v. Robson[5] applied in Walker v. Bradford Old Bank[6]. 45. If the debt, which was not yet payable, had been prospectively payable in Hong Kong by a Hong Kong debtor the Commissioner would not, I apprehend, have treated it as an interest in expectancy (as defined in section 2(1)) for the purposes of section 13(6) of the Estate Duty Ordinance. On the contrary, it seems likely that he would have followed the former practice of the English Estate Duty Office indicated in Dymond's Death Duties (15th edition) Vol. I at page 84 and levied duty on the deceased’s disposable interest under the promissory note as property vested in possession in the deceased at the date of his death. 46. No doubt a claim for a discount on the nominal value of the future debt would be entertained, but there would be no question that property within the meaning of that expression as widely defined in section 3(1) of the Estate Duty Ordinance, had passed on the death of the deceased which was liable to estate duty subject only to the question of valuation. 47. Accordingly, as regards the first question treated as impliedly raised by the originating summons there can, in my judgment, be no doubt that on the death of the deceased what passed was not a due debt or immediate obligation evidenced by the promissory note, but property in the form of the deceased’s disposable right to receive in the future and, if necessary, enforce payment with interest of the amount specified in the note, upon presentment of the note in Monrovia. 48. As to the question of the situs of the deceased’s right, the Estate Duty Ordinance requires that, however artificial the exercise may be, it is necessary to allocate a situs to that right which constituted property of the deceased at the date of his death. If authority is needed for that proposition it is to be found in English Scottish and Australian Bank Ltd. v. I.R.C.[7] where the House of Lord, confirmed that, where a statute so requires, a location must be given to property even if the property is not tangible. 49. At the forefront of Mr. Feenstra’s argument for the Commissioner was the proposition that the judge was right to the extent only that he based his decision on the settled rule that the situs of a simple debt was the country where the debtor resides. Mr. Feenstra's complaint was that the judge had erred when applying the right rule. At the forefront of Mr. Dicks argument for the respondent was the contention that residence of the debtor was not the correct test for the determination of the situs of the right and obligation contained in or evidenced by the promissory note. 50. Mr. Dicks advocated the application of the general principle formulated in Dicey & Morris (10th edition) Vol. 2, Rule 76 (1) at page 528, namely that choses in action generally are situate in the country where they are properly recoverable or can be enforced. In the alternative Mr. Dicks' argued that to the extent that the judge based hi~ decision on the country of residence of the debtor company, his decision was right. 51. In my judgment Mr. Dicks was right in contending that, as there was no debt due or existing cause of action at the date of the deceased’s death, this was not a case where the country of residence of the company as the debtor should determine the situs of the deceased's interest under the promissory note. The authorities seem to me to support that view. In applying what is now the settled jurisdictional rule based on the application of the historical practice of the spiritual courts, the modern courts appear to have always applied the rule in relation to debts actually due and not in terms that would embrace a debt which is not yet payable. 52. Thus in Attorney-General v. Dimond[8] and Attorney-General v. Hope[9] the rule that the situs of a simple debt is determined by the country where the debtor resides was applied in relation to foreign debts where there was principal or interest actually due and payable. In the leading case of Attorney-General v. Bouwens[10] at page 191 Lord Abinger in the course of stating what he understood to be established law applicable in relation to the locality of various descriptions of assets, observed:-
53. In New York Life Insurance Co. v. Public Trustee[11] Pollock M.R., delivering the leading judgment of the Court of Appeal, appears to have understood the rule, as applied in the Bouwens Case and adverted to by Lord Esher in his dissenting judgment in Attorney-General v. Lord Sudeley[12], as applicable to debts due to the relevant creditor. He had this to say at page 109:-
54. In English, Scottish and Australian Bank Ltd. v. I.R.C.(7), Mr. Wilfred Greene (as he then was) cited to the House of Lords all the relevant authorities going back to the time of Elizabeth in support of the rule. In the leading speech in that case Lord Buckmaster treated the rule as settled and cited, at page 243, a passage in the opinion of the Board delivered by Lord Merrivale in Royal Trust Co. v. Attorney-General for Alberta[13] at page 150. The passage cited ends with the words:-
55. It is significant for present purposes that the opinion continued with the following sentence:-
56. Both the two last mentioned cases were concerned with existing debt and not debts which were not yet payable. In the light of the authorities cited above the rule is applicable only where there is a debt actually due. The rule is based on the realities of recoverability. If nothing is yet recoverable, because nothing is yet due, there seems to be no room for the application of the rule. Before something has become recoverable by demand or suit there can be no situs of a debt because no debt is due. 57. Support for this conclusion is to be found in the dictum of Pearson J. in Jabbour v. Custodian of Israeli Absentee Property[14] at page 154 where, after setting out the facts and relevant dates in Perry v. Equitable Life Assurance Society of the United States of America[15], Pearson J. said:-
58. In Re Helbert Wagg & Co. Ltd.'s Claim[16] at pages 339-40 Upjohn J. adopted Pearson J.’s views in the following obiter dictum:-
This passage is relied upon by the editors of Dicey & Morris (10th edition, Volume 2 at page 530, Note 56) and Halsbury’s Laws of England (4th edition, Volume 8, paragraph 633, Note 1) for the proposition that until a debt is payable and recoverable it has no situs. 59. Mr. Feenstra relied upon the Helbert Wagg Case as determining the situs of a series of debts, which had accrued but had not yet became payable, by the application of the residence of the debtor rule notwithstanding a stipulation in the contract that payment was to be made in a country other than the country where the debtor resided. The headnote of the report of that case appears to support this proposition. 60. However I agree with Mr. Dicks that Unjohn J.'s opinion on the situs of the debts under consideration in that case was obiter. At page 342 the judge had already decided the issue between the parties by holding that German law was the proper law of the relevant contract and that the court recognized the validity of the German Moratorium Law which had discharged it. Because the matter had been very fully argued before him, Upjohn J. then went on to consider the situs issue although he had held that it was not the relevant consideration. He considered himself to be bound by the decision of the Court of Appeal in Deutsche Bank and Disconto Gesellschaft v. Banque des Marchands de Moscou (unreported, C.A. 1931) and expressed the opinion at page 344 that the locality of the relevant debt was Germany, the only place where the debtor resided. 61. Although Upjohn J. expressed that opinion it is apparent from his earlier observations at the beginning of his judgment at pages 339-40, which I have cited above, that it did not seem to him to be appropriate to speak of a debt having a local situation until it was payable and could be recovered by suit. In my judgment his opinion regarding the situs of the relevant debt is to be treated as qualified by his important earlier observations. Moreover the unreported decision of the Court of Appeal in the Deutsche Bank Case, by which he was bound, was concerned with the situs of a debt actually due from a bank in the form of a current account. 62. The only other relevant authority which was relied upon by Mr. Feenstra as supporting the proposition that the residence of the debtor was the appropriate test to determine the situs of a debt not yet payable was Attorney-General v. Pratt[17] to which Sir Alan Huggins V.-P. has referred. That case seems to me to have turned on its own special facts where the relevant bills of exchange were the machinery for the transfer of Archdeacon Pratt's money from India to England. All the members of the court felt able to base their decision on hindsight which showed that the relevant bills had in the event been accepted and honoured by the relevant English Bank subsequent to the death of the Archdeacon who was not the payee named in the bills. However, in the present case there is no evidence to indicate whether or not the promissory note has ever been presented or paid. 63. In my judgment the qualified opinion of Upjohn J. in the Helbert Wagg Case and the decision of the Court of Exchequer in Pratt’s Case are not to be regarded as authority for the proposition that the situs of a debt which is not yet payable is the country of residence of the debtor. On the contrary the balance of authority cited above is to the effect that the rule is that the situs of a debt due and payable is the country of residence of the debtor. The necessary consequence seems to me to be that a debt which is a future debt in the sense of being accrued but not yet due, can have no situs qua debt because nothing is yet recoverable. 64. I am therefore unable to accept Mr. Feenstra’s argument that the situs of the promissory note at the date of the deceased's death is to be determined by the country of residence of the debtor company. His main argument therefore fails in limine. I add that, concurring with the Vice-President. I would have rejected Mr. Feenstra’s argument that the sole residence of the company was Hong Kong because that was where its central management and control was exercised. Mr. Dicks was clearly right in contending that the test of the location of central management and control of a company for the determination of the place of residence of a company for income tax purposes was not to be applied when determining the situs of a debt due from a debtor who happens to be a company. The comment on Rule 138 in Dicey & Morris, 10th edition, Volume 2 at page 728, seems to accept that the Rule is not one of general application. 65. Applying the reasoning of Romer L.J. in the unreported Deutsche Bank Case (cited by Roxburgh J. in Re Banque des Marchands de Moscou (Koupetschesky) (No. 2)[18] at pages 1115-16, I would also have rejected Mr. Feenstra’s argument that the company could be given a jurisdictional presence in Hong Kong by means of service outside the jurisdiction pursuant to Orders 11 or 10 (2) of the Rules of the Supreme Court. Service out of the jurisdiction of the court is a matter for the discretion of the court exercisable, if the requirements of the rules are otherwise met, in accordance with the balance of convenience. There has never been an application for service of the company out of the jurisdiction. Until such an application were made and granted the company could not be deemed to he resident in Hong Kong by virtue of such service, but I respectfully agree with Romer L.J. that in any event the fact that a simple contract debt can be recovered in Hong Kong from a debtor out of the jurisdiction does not establish a Hong Kong locality for the debt. 66. Having rejected the country of residence of the debtor company as the correct test for determining the situs of the deceased's contractual right under the promissory note I conclude that the judge's decision is not sustainable in so far as he applied that test. The question remains whether the judge was right to apply his “recoverability” test on the footing that a chose in action is regarded as situate in the country where it is recoverable. This is the general principle stated as Rule 76(1) by the editors of Dicey & Morris, Vol. 2 at page 528, in. the following terms:
67. The substance of Mr. Dicks’ argument was that the place of recoverability test was the correct test and that the judge had applied the test properly so as to produce the right result. For my part I respectfully follow Pollock M.R. in the passage I have cited above from the New York Life Insurance Co. Case at page 109 accepting Dicey’s place of recoverability test as the general test applicable for the determination of the situs of a chose in action. Indeed the rule that the situs of a debt due for payment is determined by the country of residence of the debtor is really an example of the application of the general principle to a particular class of chose in action. 68. The difficulty arises when the test is applied to the deceased’s disposable right under the promissory note at the date of his death. At that date nothing was recoverable in Monrovia. No payment was even due. Furthermore there is no evidence to justify even a pious hope that there were at the relevant date any funds of the company in Monrovia and available to make payment in discharge of the promissory note when, if ever, it came to be presented there. 69. It therefore seems to be absurdly artificial in all the circumstances to attribute to the deceased’s disposable right under the promissory note a situs in Monrovia where at the relevant date he could recover nothing under it. On the other hand at the date of his death he was in Hong Kong where he could have assigned his right under the note. The note itself was in Hong Kong on the evening before his death. There is no evidence that it has ever left Hong Kong. Whether the correct approach is to look to the promissory note itself as having a chattel value or to the contractual right evidenced by the note, the deceased was able at his death to realise its value after making an appropriate discount from the nominal value of the note. 70. Accordingly I conclude that the application of the recoverability test results in the allocation of a Hong Kong situs to the deceased's right under the promissory note at the date of his death. I emphasise that I arrive at this conclusion because of the saleability of the deceased’s interest in the note at the relevant time. The fact that if and when the note is ever presented for payment a debt will become due which, applying the usual rule, would probably have a situs in Liberia does not, in my judgment, preclude the note evidencing at the deceased's death a contractual right which has a Hong Kong location. I consider this to be a realistic conclusion when the evidence shows that a due debt has not yet and may never come into existence. 71. If and when the debt becomes payable its assignability will not govern the determination of its situs because the court is bound to apply the settled rule that the situs of a debt which is due is to be determined by the country of residence of the debtor. The deceased’s executors would then be in the position where they could recover or enforce payment of the note in Liberia (at least in theory if not in reality) or assign the debt in Hong Kong. 72. However at that time they would only be able to assign a debt which had a Liberian situs. That was not the position of the deceased at the date of his death, because the deceased was not able to assign a debt then due and payable, with a Liberian situs. 73. There is no authority directly in point but I find some support in the judgment of Kelly C.B. in the Pratt Case at page 144 relying on the value of the relevant bills of exchange to the executors of Archdeacon Pratt in England by virtue of the assignability of the bills for a discounted value before their maturity. The language used by Kelly C.B. at pages 143-144 regarding the saleability of the bills in that case seems to me to be consistent only with the bills having been drawn without reference to "order" or “bearer” and therefore being non-negotiable in the then state of the law: see Byles on Bills of Exchange, 25th edition, at page 83. Kelly C.B. said:-
74. The possible materiality of assignability was touched upon, albeit in relation to a debt due for payment, by Pollock M.R. in the New York Life Insurance Co. Case at pages 108-9 where he adverted to Rigby L.J.’s consideration of the basis of the decision in the Bouwens Case in Smelting Company of Australia Ltd. v. I.R.C.[19] at page 183. The latter decision of the Court of Appeal was reversed by the House of Lords in the English Scottish and Australian Bank Limited Case but, I apprehend, not on grounds affecting Rigby L.J.'s consideration of the Bouwens Case. 75. Mr. Dicks, in supporting the judge's order, relied as he had done below, on the majority decision of the Court of Appeal in Power Curber International Ltd. v. National Bank of Kuwait[20]. In that case the Court of Appeal had to consider inter alia the lex situs of an irrevocable letter of credit. The defendant was the issuing bank. The advising bank was the Bank of America, Florida, Miami, U,S.A. through the North Carolina National Bank in Charlottes North Carolina. The plaintiffs were an American corporation which shipped goods on c.i.f. terms to buyers in Kuwait, to be paid for by the irrevocable letter of credit to the extent of U.S.$300,000 issued at the request of the buyers on the 6th September 1979 by the defendant bank in favour of the plaintiffs. 76. Under the terms of the letter of credit, 25 per cent of the ex-works value of the goods plus freight and insurance was to be paid against presentation of documents. The remaining 75 per cent was payable after one year of the date of shipment. On the 26th December 1979 goods valued at U.S.$101,059 were shipped and 25 per cent payment was made on presentation of documents. On the 4th March 1980 the defendant bank informed the North Carolina National Bank that U.S.$75,794 would be remitted through a New York trust company on the 26th December 1980. 77. Thereafter, in November 1980 the buyers filed a claim in the courts of Kuwait against the plaintiffs for the equivalent of about U.S.$180.000. On the 5th November 1980 the buyers obtained an order from the court in Kuwait for the “provisional attachment” of the sums payable by the defendant bank to the plaintiffs under the irrevocable letter of credit. The effect of this order in Kuwait was to prevent the defendant bank from making any further payment in or outside Kuwait under the letter of credit. 78. After starting and then discontinuing proceedings against the defendant bank in North Carolina the plaintiffs began proceedings in England claiming U.S.$75,794 against the bank. Parker J. gave judgment for the plaintiffs for that sum and interest under Order 14 but stayed execution until further order. The plaintiffs appealed against the stay and the bank cross-appealed against the judgment. The Court of Appeal allowed the appeal and dismissed the cross-appeal. 79. On the cross-appeal against Parker J. 's judgment it was contended on behalf of the defendant bank inter alia that the effect of the Kuwaiti court order was that payment under the letter of credit had became unlawful because the lex situs of the debt was Kuwait and it was that law which governed the effect of the order which should be given effect to by the English court. 80. Mr. Dicks relied on the majority decision of Lord Denning M.R. and Griffiths L.J. on this issue. Lord Denning expressed his decision in the following words at page 1240F:-
Griffiths L.J. had this to say on the same issue at page 1242G: -
Waterhouse J. dissented on the lex situs issue. He made the following observations at page 1244B:-
81. Mr. Dicks pointed out that the Power Curber Case is referred to in the supplement to Dicey & Morris where a note requires the addition in Volume 2 of that work at page 531 of the words – “A debt arising under an irrevocable letter of credit is situated in the place where it is payable against documents”, followed by the citation of the Power Curber Case. This addition is to be made at the end of the passage in Dicey & Morris dealing with the situs of debts. 82. Without in any way questioning the majority decision on the lex situs issue in the Power Curber Case I consider that decision to relate to matters which are wholly distinguishable from those with which the present case is concerned. 83. As Waterhouse J. indicated at page 1244C-D, the Court of Appeal was concerned in the Power Curber Case with a “debt due” which had allegedly been attached by a foreign decree. It was not concerned with the situs of a debt which had not yet become payable. The relevant documents had been presented, the initial 25 per cent payment had been made and the balance of the sum payable under the letter of credit had become due on the 26th December 1980. It was common ground between the parties that a debt was due under the letter of credit. The issue between them was whether the Kuwaiti order of provisional attachment of that debt was effective outside Kuwait and should be recognised by the English court. No question ever arose regarding the situs of the letter of credit or the property it evidenced before the debt became due and payable. 84. Furthermore, I think it is clear that the majority of the court in that case were influenced in their decision by the special character of letters of credit in the field of commerce. It is for this reason that they are, in the absence of fraud, to be treated as the equivalent of cash. When Lord Denning observed in that case at page 1241B that a letter of credit was like a bill of exchange given for the price of goods and that it ranked as cash and must be honoured. I have no doubt that he meant to refer to a negotiable bill of exchange which is treated as the equivalent of cash and which is given a situs wherever it may be from time to time. 85. Likewise, when Lord Denning made a like remark (upon which Mr. Dicks relied) in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd.[21] at page 170H to the effect that performance guarantees were virtually promissory notes payable on demand, he made it in the context of the court’s decision that such guarantees stood on a similar footing to letters of credit and his reference to promissory notes must, in my judgment, have been intended to draw an analogy between performance bonds and negotiable promissory notes given for or in relation to the price of goods. Certainly in the Power Curber Case. Waterhouse J. seems to have understood the majority view of the other members of the court on the lex situs issue to be based on the analogy of negotiable bills or at least securities transferable by delivery. At the conclusion of his dissenting judgment on this issue he clearly implied this when he observed:-
86. In the present case the deceased could not have transferred his interest under his non-negotiable promissory note by delivery. Moreover, I can find nothing in the Power Curber Case that requires a departure, in relation to a non-negotiable promissory note, from the dictum of Lord Abinger in the Bouwens Case at page 191 which Pigott B. adopted in Pratt’s Case at page 146, to the effect that bills of exchange and promissory notes do not alter the nature of the simple contract debts but are merely evidence of title to those debts. 87. In my judgment the authorities relied upon by Mr. Dicks do not therefore support, by analogy or otherwise, the judge's decision in so far as it was based upon what the judge termed the "situs of the instrument" test. Mr. Dicks invoked section 4 of the Bills of Exchange Ordinance (Cap. 19) and pointed out that the promissory note in the present case was a foreign bill for the purposes of that provision. However he was not able to develop any pertinent argument in reliance on this. 88. Mr. Dicks also relied upon the proposition that if the promissory note was to be regarded as evidence of a contractual right of the deceased at the date of his death then the proper law of the contract was Liberian law and the situs of the contractual right was Liberia. In the absence of any authority to support this proposition I am unable to accept it in view of the general test of place of recoverability stated by Dicey & Morris's Rule 76(1) in respect of choses in action. 89. This being a case where the reality was that at the date of the deceased’s death nothing was recoverable in Monrovia under the promissory note, but the note evidenced a contractual right which was assignable for value in Hong Kong together with the transfer of the note itself as evidence of title, I conclude that the decision of the judge was wrong and that he should have held that:- 90. At the date of the deceased's death:
91. Accordingly I agree with the Vice-President that this appeal should he allowed. 92. I am mindful that the basis of our decision was not advocated by Mr. Feenstra for the Commissioner when the appeal was argued during the five day hearing ending on the 29th October 1986. It was for this reason that on the 31st December 1986, we sought to reopen the matter for further argument. It was not possible to arrange a further hearing until the 12th February 1987 when Mr. Hinchen for the Commissioner informed us that he adopted the courts approach but did not seek to argue for or against it. 93. We heard Mr. Dicks on the question whether the originating summons was fatally defective and on the question whether, as a matter of 1aw, a Hong Kong situs should be allocated to the deceased’s contractual right evidenced by the promissory note at the date of his death. We also heard his contention that in any event such a course was not procedurally permissible in the absence of a respondent's notice. 94. In Hong Kong we have an adversarial forensic system. However I apprehend that when hearing an appeal by way of rehearing under Order 59 rule 3(1), this court is entitled to exercise the wide power conferred by Order 59 rule 10(3) and not obliged to confine itself to the role of a blinkered referee who is obliged to limit its consideration to the points raised in the notice of appeal or respondent s notice. Put another way, my understanding is that the Court of Appeal is not precluded by the rules of procedure, or at all, from exercising its faculties and taking a material point at the hearing of an appeal. In the present case, where the court holds the balance impartially between the Revenue and the subject, it seems to me that it is nevertheless the duty of the court to take an important material point even if it has not been taken by the relevant party, provided the other party is given an opportunity to be heard on the point and subject always to the question of costs. Fuad, J.A.: 95. I have had the advantage of reading, in draft, the judgments just delivered and I agree that the appeal should be allowed. For the reasons given by my Lords, I, too, have concluded, in the words of Clough J.A., that at the date of the deceased's death:
Sir Alan Huggins, V.-P. : We are all now agreed that there should be an order nisi as to costs in the terms I have proposed. 26th March 1987 B.F. Feenstra for Defendant/Appellant. A.R, dicks for Plaintiff/Respondent. [1] [1981] 1 W.L.R. 1233 (C.A.) [2] [1924] 2 Ch. 101 (C.A.) [3] [1954] 1 W.L.R. 139 [4] (1878) 3 Q.B.D. 569 (C.A.) [5] (1878) 3 Q.B.D. 686 [6] (1884) 12 Q.B.D. 511 [7] [1932] A.C. 238 [8] (1831) 1 C. & J. 356 [9] 2 Cl. & F. 84 [10] (1838) 4 M. & W. 171 [11] [1924] 2 Ch. 101 (C.A.) [12] [1896] 1 Q.B. 354 (C.A.) [13] [1930] A.C. 144 [14] [1954] 1 W.L.R. 139 [15] (1929) 45 t.L.R. 468 [16] [1956] Ch. 323 [17] (1874) 9 Ex. 140 [18] [1954] 1 W.L.R. 1108 [19] [1897] 1 Q.B. 175 (C.A.) [20] [1981] 1 W.L.R. 1233 (C.A.) [21] [1978] 1 Q.B. 159 |