Commissioner of Inland Revenue v. Roderick John Sutton, Joint and Several Liquidator of Moulin Global Eyecare Trading Ltd

CACV 285/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 285 OF 2009

(ON APPEAL FROM HCCW NO. 471 OF 2005)

----------------------

----------------------

----------------------

Before: Hon Rogers VP, Le Pichon JA and Stone J in Court

Date of Hearing: 13 July 2010

Date of Judgment: 13 July 2010

Date of Handing Down Reasons for Judgment: 19 July 2010

---------------------------------------

REASONS FOR JUDGMENT

-------------------------------------

Hon Rogers VP:

1.This was an appeal from a judgment of Kwan JA, (sitting as an additional judge of the Court of First Instance) given on 17 December 2009.  The matter before the judge was an appeal by the Commissioner of Inland Revenue (“the Commissioner”) under rule 95 of the Companies (Winding-up) Rules from the rejection of his proof of debt by one of the joint and several liquidators of Moulin Global Eyecare Trading Ltd (“the company”).

2.The judge allowed the appeal and reversed the liquidators’ decision rejecting the proof of debt of the Commissioner in the sum of $10,363,532 and ordered that the proof of debt be admitted in full.  At the conclusion of the hearing of this appeal, this court dismissed the liquidators’ appeal with costs in favour of the Commissioner, with reasons to be given in writing which we now do.

Background

3.The company was formerly known as Moulin Optical Manufacture Limited.  It was incorporated in Hong Kong and was a subsidiary of Moulin Global Eyecare Holdings Limited (“Holdings”), which was a Bermudian company listed on the Hong Kong Stock Exchange.

4.Although the group of which the company formed part was very substantial, Holdings, the company and another company within the group were the subject of winding up petitions presented on 21 June 2005.  Provisional liquidators were appointed and, later, the company was ordered to be wound up on 5 June 2006.  The provisional liquidators were appointed the liquidators of the company by an order dated 28 August 2006.

5.The issue in this appeal is in a remarkably small compass.  It involves the tax assessments in respect of five years namely: 1999/2000, 2001/2002, 2002/2003, 2004/2005 and 2005/2006.

6.The Commissioner exercised the powers under section 60(1) of the Inland Revenue Ordinance Cap. 112 (“the Ordinance”) and raised additional assessments in respect of the years 1999/2000, 2001/2002 and 2002/2003.  The Commissioner was entitled to do that within 6 years of the date of assessment.

7.In respect of the is 2004/2005 and 2005/2006 the Commissioner exercised the powers under section 59(3) which provided that where a person had not furnished a return and the assessor was of the opinion that that person was chargeable with tax, he may estimate the sum in respect of which that person is chargeable to tax and make an assessment accordingly.

8.It is the Commissioner’s case that statutory liability to pay the tax arises upon the making of the assessments under sections 59 and 60.  In this respect, it is said that the provisions of section 70 of the Ordinance are applicable:

“Where no valid objection or appeal has been lodged within the time limited by this Part against an assessment as regards the amount of the assessable income or profits or net assessable value assessed thereby, or where an appeal against an assessment has been withdrawn under section 68(1A)(a) or dismissed under subsection (2B) of that section, or where the amount of the assessable income or profits or net assessable value has been agreed to under section 64(3), or where the amount of such assessable income or profits or net assessable value has been determined on objection or appeal, the assessment as made or agreed to or determined on objection or appeal, as the case may be, shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable income or profits or net assessable value: Provided that nothing in this Part shall prevent an assessor from making an assessment or additional assessment for any year of assessment which does not involve re-opening any matter which has been determined on objection or appeal for the year.”

9.There is no dispute that the company has not exercised, within the relevant time, the statutory provisions for lodging objections or appeals to those assessments.  Those provisions are contained in sections 64 to 70B of the Ordinance.  Furthermore, no tax return has been filed for the years of assessment 2004/2005 and 2005/2006.  The liquidators have stated that they are not able to reconstruct a complete set of accounts for the company.  As a result they have not been able to file returns or lodge any objection to the estimated assessments for those years.  The liquidators, however, point to the fact that there is considerable reason to suppose that there has been major false accounting in respect of the company’s accounts.  These included fictitious sales to supposed “North American Debtors”, cash advances involving fictitious loans to third parties and fictitious cash advances to customers in respect of what has been referred to as board space agreements.  Nevertheless, as recorded by the judge at paragraphs 55 and 56 of the judgment, the liquidators do not dispute that:

(1)   the various assessments have become final and conclusive under section 70 of the Ordinance as no or no valid objections have been received by the Commissioner within the time limit in section 64(1);

(2)   although there is other litigation between the liquidators and the Commissioner, as at present, section 70A is not applicable because its own time limits have expired, or because the conditions for correction do not exist, or both.

10.What is contended on behalf of the liquidators is that they could go behind the assessments in adjudicating the proofs of debt of the Commissioner as the provisions of the Ordinance did not override the liquidators’ statutory duty to ensure that only the true liabilities of the company are recognised and brought into the statutory trust estate for the creditors of the company.

11.The judge rejected that argument.  She went into considerable detail citing a number of decisions.  The effect of those decisions can be summarised that there is not a word in that which causes the slightest notion that there was any merit in such an argument.

12.In my view, quite simply the provisions of the Ordinance have been satisfied.  The Commissioner has raised valid assessments.  Tax is payable as a result of those assessments.  Neither the company nor the liquidators have, or at any rate not yet, exercised any of the options that might have been open to them to either appeal, challenge or object to those assessments.  It is simply not open to the liquidators to challenge the fact that debts based on those assessments are validly due.

13.It was Mr Barlow SC’s submission that section 70 of the Ordinance merely provided that the assessments should be final and conclusive for the purposes of the Ordinance and did not bind the liquidators in the exercise of their functions.  It was said that the liquidators were under a duty to reject proofs of debt for alleged liabilities which had been created by fraud or pretence.  In this case it was said that the accounts of the company were not real and did not disclose true profits.  As a result the assessments were not based upon reality.  The argument proceeded along the lines that section 70 of the Ordinance merely provided an estoppel which was deemed to exist by reason of the statute and that could not override the liquidators’ statutory duty to ensure that only true liabilities of the company were recognised.  In this respect reliance was placed on what was said in the joint judgment of Brennan J and Dawson J in the case of Tanning Research Laboratories Inc v O’Brien [1989-1990] 169 C.L.R. 332 at p. 339-340:

“A liquidator may properly reject a proof of debt if the liability, though enforceable against the company, is not a true liability of the company but is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of creditors or contributories in the assets available for distribution.”

14.That judgment then went on to quote from Buckley LJ in the case of In re Vay Laun; ex parte Chatterton [1907] 2 K.B. 23 at page 31.  That passage referred to the ability of a trustee to ignore a judgment if “for some good reason” there ought not to have been a judgment.  The judges in the Tanning case went on to say:

“ Perhaps some guidance may be found in the terms employed by Barwick CJ in Wren v. Mahoney (1972) 126 C.L.R. 212 at page 223, in reference to the grounds on which a Court of Bankruptcy will go behind a judgment:

“Circumstances tending to show fraud or collusion or miscarriage of justice or that a compromise was not a fair and reasonable one, in the sense that even if not fraudulent it was foolish, absurd and improper, or resulted from an unequal position of the parties (see In re Hawkins; ex parteTroup [1895] 1 Q.B. 404 at page 409, offer occasions for the exercise by the Court of Bankruptcy of its power to enquire into the consideration for the judgment.”

It is not necessary in this case to determine the scope of this qualification.  It suffices to note that it qualifies the principles governing the additional rejection of a proof of debt by arming the liquidator with grounds for rejecting a proof of debt additional to any grounds available under the general law.”

15.In my view, the distinction here is that the tax which has been assessed as payable is a statutory debt.  It is assessed under the provisions of the Ordinance.  There are set procedures for challenging any assessment of tax under the Ordinance.  As was said by Lord Nicholls of Birkenhead in the case of Autologic Holdings plc v IRC [2006] 1 AC 118 at page 126, given the existence of the statutory procedure for dealing with disputed assessments, that procedure should be followed.  That echoes the approach of the House of Lords in the case of In re Vandervell’s Trusts [1971] AC 912 where, in particular, Viscount Dilhorne and Lord Diplock pointed out that the court had no jurisdiction after an assessment to tax to adjudicate between the taxpayer and the Inland Revenue on the correctness of the assessment or any underlying issue of fact on which the correctness of the issue depended.  As Lord Wilberforce pointed out in his speech in that case (at pages 938-9) there is a special procedure laid down for the determination of the correctness or otherwise of an assessment and that must be followed.

16.In those circumstances, I see no ground whatever for allowing this appeal.

17.In the circumstances, it is unnecessary and, therefore, undesirable, to consider the counter notice served on behalf of the Commissioner which turned on the question as to whether the liquidators could rely upon the faults, to use a neutral word, of those responsible for preparing the original accounts.

Hon Le Pichon JA:

18.I agree with the reasons for judgment of Rogers VP and Stone J.

Hon Stone J:

19.I respectfully agree with the Reasons for Judgment of the Vice-President.

20.In the course of arguing this appeal, Mr Barlow SC for the appellant liquidator sought to characterize this case as an “exceptional and unusual case” the facts of which revealed a ‘tension’ between the provisions of the Inland Revenue Ordinance, Cap. 112 [‘IRO’] and those of the Companies Ordinance, Cap 32, and proceeded to argue that the role of the liquidator in adjudicating a proof of debt in the liquidation in effect ‘trumped’ or transcended the legal rights of the Commissioner of Inland Revenue under the provisions of the IRO.

21.This result was justifiable, he said, on the basis of the clear duty of the liquidator to ensure that only the true liabilities of the company are recognized and thus are brought into the statutory trust estate for the benefit of the true creditors of the company, and that this latter duty was not possible on the facts of the present case, given the obvious frauds that had been committed on the company’s former officers, frauds which had come to the attention of the liquidator – hence the latter’s rejection of the proof of debt as submitted by the Commissioner in respect of trading profits, both actual and estimated, for the tax years in question.

22.In response, Mr Beresford’s contention on behalf of the Commissioner was succinct, straightforward, and in my view wholly correct.

23.He submitted that there was a lengthy line of authorities, commencing with the judgment of Wright J in In re Calvert, ex parte Calvert [1899] 2 QB 145, wherein it had become settled law that where a statutory procedure has been established for considering objections and appeals against assessments to tax, the correct (and indeed the only) way for the liquidator to challenge that assessment was by way of such specific procedures, and not by his personal assessment/characterisation of the position, which in this instance had resulted in rejection of the Commissioner’s proof of debt as filed in this liquidation.

24.In his judgment Vice-President has pointed out not only that an ensuing line of cases of high authority has embraced and approved this proposition, but also that it is not in dispute in this case that the appellant liquidator did not avail himself of the appropriate statutory provisions, within sections 64 to 70B, Cap.112, for lodging objections or appeals to the tax assessments as rendered, and upon which assessments the Commissioner’s proof of debt was founded.

25.In fact, the position remains that, through no fault of the liquidator, even now it has not proved possible to do other than merely to surmise the precise extent of the fraud perpetrated upon the company, far less to render detailed and proper accounts for the years in question.

26.It is clear that the provisions of the Inland Revenue Ordinance give effect to an underlying policy to provide exclusive procedural machinery to object/appeal against tax assessments, and at the culmination of this process thereby to achieve finality in the adjudication of tax liability.

27.It is equally clear that in this case the liquidator had the opportunity to file objections to the assessments as rendered by the Commissioner, and did not do so; nor apparently, given the practical difficulties faced by the liquidator in establishing the true financial situation of the company in the tax years in question, were extensions of time requested.

28.This being the situation, for my part I am able to perceive neither ‘tension’ nor ‘discordance’ between the Inland Revenue Ordinance on the one hand and the Companies Ordinance on the other, and, with respect, I disagree with Mr Barlow’s robust contention within his skeleton argument that the central issue in this appeal “is whether or not our law is so inept” as to place his liquidator client in the situation wherein his allegedly justifiable rejection of the Commissioner’s proof of debt legitimately is reversed.

29.It strikes me that to accede to Mr Barlow’s persuasive argument, founded as it is upon the “exceptional circumstances” of this case, would be to drive a coach and horses through the specific procedural requirements for objection/appeal against tax assessments as laid down in the IRO, and that at bottom acceptance of his propositions would be akin to administering ‘palm tree justice’.

30.In my view in her careful and analytical judgment the learned  judge below was entirely correct in reversing the liquidator’s decision so to reject the Commissioner’s proof, and in upholding the Commissioner’s appeal therefrom under Rule 95 of the Companies (Winding-up) Rules.

Mr Roger Beresford, instructed by Department of Justice, for the Applicant/Respondent

Mr Barrie Barlow SC, instructed by Messrs Mayer Brown JSM, for the Respondent/Appellant