COMMISSIONER OF INLAND REVENUE v. RODERICK JOHN SUTTON, JOINT AND SEVERAL LIQUIDATOR OF MOULIN GLOBAL EYECARE TRADING LTD

HCCW 471/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 471 OF 2005

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DECISION

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1.  This is an appeal of 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 the one of the joint and several liquidators of Moulin Global Eyecare Trading Limited (“MGET” or  “the Company”, formerly known as Moulin Optical Manufactory Limited). The proof of debt was submitted on 15 August 2006 for an amount of HK$10,363,532, made up of additional assessments of profits tax for the years of assessment of 1999/2000, 2001/2002 and 2002/2003, and estimated assessments of profits tax of the years of assessment of 2004/2005 and 2005/2006 in the absence of a profits tax return submitted by MGET for those two years.

2.  The liquidator rejected the proof of debt by a notice of adjudication dated 6 February 2007. The ground for his decision read as follows:

“I have rejected your claim against the Company in full on the basis that your profit tax assessments from 2000 to 2006 were based on misstated financial statements and accounting of the Company.  The reported income of the Company was wrongfully inflated by certain trade debtors that I assert do not exist.  The Company reported income was also inflated by other fraudulent transactions.  We are in process of identifying.  The Company has not traded since 23 June 2005 i.e. the date of our appointment.

Consequently, we are of the view that if the Company’s accounts were properly recorded, the Company would have operated at a loss and consequently no tax liability would result.  Accordingly, I have rejected your claim against the Company in full.

This applies to all years included in your assessment.”

3.  I will first relate the relevant background matters.

The liquidation of the Moulin Group

4.  Moulin Global Eyecare Holdings Limited (“Holdings”), a company incorporated in Bermuda, was the ultimate parent company of a large group of companies incorporated in many jurisdictions throughout the world which included MGET (“the Group”). The shares of Holdings were listed on the Hong Kong Stock Exchange.  The headquarters of the Group were in Hong Kong. On its website, the Group described itself as the largest optical group in Asia and that it ranked as one of the top three eyewear businesses in the world in terms of manufacturing capabilities and distribution strength.

5.  MGET was a company incorporated in Hong Kong and an indirect wholly owned subsidiary of Holdings.  It was the operating flagship of the Group and, based on its turnover, it was the largest operating subsidiary and had performed a treasury function for the Group until this function was taken over by Oaktree Investment Limited, another company within the Group incorporated in Hong Kong.

6.  Following the failure of the Group to pay the amounts demanded by one of its bank creditors, winding-up petitions were presented against Holdings, MGET and another Group company Leadkeen Industrial Limited on 21 June 2005. Provisional liquidators were appointed for all three companies on 23 June 2005 and they were all ordered to be wound up on 5 June 2006. The provisional liquidators were appointed as the liquidators of MGET by a court order on 28 August 2006. Where reference is made in this decision to “the liquidator”, this will be taken as also referring to the provisional liquidators and the liquidators acting jointly where the context so requires.

7.  The liquidation of the Group has been one of the most complex liquidations to have been conducted in Hong Kong, given the size of the Group’s operations and the complexity of the issues involved.  There had been active destruction of the books and records of the Group before the appointment of provisional liquidators, who had discovered widespread accounting irregularities within the Group. It would take many years to fully investigate numerous irregular transactions and to restate the true financial position of the Group. In an application of the liquidator for directions concerning the treatment of various inter-company debts, Barma J accepted it would be unrealistic to expect or require the liquidator to attempt a full reconstruction of the accounts (Re Moulin Global Eyewear Holdings Ltd. [2007] 4 HKC 315 at 322, para. 22).

8.  On 25 February 2009, the chairman, the chief executive officer and the treasurer of the Group were charged by the Commercial Crime Bureau of the police with various charges including making false statements, conspiracy to publishing false statements, conspiracy to making false statements, and conspiracy to defraud and dealing with proceeds of indictable offence.

The assessments for profits tax

9.  On the same day provisional liquidators were appointed, they wrote to the Commissioner giving notice of the appointment and making enquiries of the tax position of MGET and other companies. The Commissioner was asked if there was any outstanding tax liability and any outstanding tax returns.  On 4 August 2005, the liquidator wrote to the Commissioner seeking copies of the profits tax returns of MGET and other companies for the past three years.

10.  On 18 August 2005, the liquidator wrote to the Commissioner alerting the latter to the existence of a number of questionable transactions in MGET’s records which he was investigating and requesting to be provided with certain information to assist in the investigation.

11.  On 29 August 2005, an assessor of the Inland Revenue Department wrote to the liquidator enclosing a profits tax return for the year of assessment 2005/2006 for completion and submission within one month.  He stated that MGET had not yet filed the profits tax return for the year of assessment 2004/2005 and that an estimated assessment had been raised under section 59(3) of the Inland Revenue Ordinance, Cap. 112. He also mentioned that the Department had raised enquiries on the basis of assessment for the years of assessment of 1999/2000 and 2000/2001 and the deductibility of the interest expenses throughout the years from 1999/2000 to 2002/2003. In response to the enquiries raised, the former tax representative of MGET Ernst & Young had on various dates submitted revised computations for the years from 1999/2000 to 2002/2003 and additional assessments had been issued by the Department to incorporate the necessary adjustments for those years.

12.  Four notices of assessment and demand for tax were issued on 29 August 2005 and the particulars were as follows:

Year of assessment	Amount of profits tax (HK$)	Due date
1999/2000	424,864	10 October 2005
2001/2002	146,390	10 October 2005
2002/2003	229,978	10 October 2005
2004/2005	1,687,300	10 October 2005

13.  The liquidator did not respond directly to any of the four notices. He was focused at that time on the more urgent task of securing assets and was still in the process of collecting information and conducting preliminary investigation into the affairs of MGET.

14.  On 25 November 2005, the Inland Revenue Department raised an estimated assessment for the year of assessment 2005/2006 under section 59(3) of Cap. 112, as no tax return was filed. The particulars were as follows:

Year of assessment	Amount of profits tax (HK$)	Due date
2005/2006	7,875,000	6 January 2006

15.  The total amount of profits tax demanded in the five notices of assessment and demand amounted to HK$10,363,532. These notices formed the basis of the Commissioner’s proof of debt filed on 15 August 2006.

The statutory scheme for profits tax

16.  The description of the statutory scheme for profits tax in Cap. 112 given below is taken largely from the submission of Mr. Beresford, who appeared for the Commissioner in this appeal.

17.  Under section 14, profits tax is charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business.  “Assessable profits” is defined in section 2(1) as meaning the profits in respect of which a person is chargeable to tax for the basis period for any year of assessment calculated in accordance with the provisions in Part IV.

18.  Section 59 requires an assessor to assess every person who is chargeable to tax as soon as may be after the expiration of the time limited by the notice requiring him to furnish a return under section 51(1). If the assessor does not accept the return, under section 59(2)(b), he may estimate the sum chargeable to tax and make an assessment accordingly.

19.  Section 59(3) provides that where a person has not furnished a return and the assessor is of the opinion that such person is chargeable with tax, he may estimate the sum in respect of which such person is chargeable to tax and make an assessment accordingly. Section 59(4) states that where accounts of a trade or business have not been kept in satisfactory form, the assessor may assess the profits on the basis of the usual rate of net profit on the turnover of such trade or business. As mentioned earlier, the assessment for the years of assessment of 2004/2005 and 2005/2006 were made under section 59(3).

20.  Section 60(1) provides for additional assessments where it appears to an assessor that for any year of assessment a person has not been assessed or has been under assessed. This may be done within the year of assessment or within six years after the expiration thereof. The provisions in Cap. 112 as to notice of assessment, appeal and other proceedings shall apply to such assessment and to the tax charged thereunder. For the years of assessment of 1999/2000, 2001/2002 and 2002/2003, additional assessments were made under this provision.

21.  The statutory liability or debt accrues or comes into existence only upon the making of an assessment under section 59 or 60.

22.  Part XI (sections 64 to 70B) governs objections and appeals of assessments.

23.  Section 64(1) provides for objections to be made by notice in writing to the Commissioner, “ but no such notice shall be valid unless it … is received by the Commissioner within one month after the date of the notice of assessment.”  This is followed by two material provisos.  Firstly, in section 64(1)(a), if the Commissioner is satisfied that owing to absence from Hong Kong, sickness or other reasonable cause, the person objecting was prevented from giving timely notice, he shall extend the period as may be reasonable in the circumstances. Secondly, in section 64(1)(b), in the case of an assessment under section 59(3) made in the absence of a return, for the objection to be valid there is an additional requirement that the return be made “within the period provided by this subsection for objecting to the assessment or within such further period as the Commissioner may approve for the making of such return.” 

24.  In this instance, no objection was made to any of the assessments issued on 29 August 2005 and on 25 November 2005 within the time provided in section 64(1). The liquidator subsequently contended that his letter of 30 November 2005 mentioned below should be treated as an application under section 64(1)(a) for an extension of time to object. In respect of the estimated assessments for the years of 2004/2005 and 2005/2006, the liquidator has not complied with the requirement in section 64(1)(b) in that the returns for those years have not been made, notwithstanding an extension of time given as mentioned below.

25.  Section 64(4) provides that in the event of the Commissioner failing to agree with any person assessed, who has validly objected to an assessment, the Commissioner shall within one month after his determination of the objection transmit in writing to the person objecting his determination together with the reasons therefor and a statement of the facts upon which the determination was arrived at, and such person may appeal therefrom to the Board of Review as provided in section 66.

26.  Section 66(1) provides for a right of appeal to the Board of Review constituted under section 65.  This right of appeal is conditional upon a valid objection having been made with which the Commissioner has failed to agree.  The notice of appeal must be given to the Board within one month, subject to a power in the Board to extend time under section 66(1A), if it is satisfied that the appellant was prevented from giving timely notice by illness or absence from Hong Kong or other reasonable cause. 

27.  Section 67(1) provides for the transfer by consent of appeals to the Court of First Instance, but otherwise they are required to be determined by the Board of Review as stipulated in section 68(1). In both cases, the onus of proving that the assessment appealed against is excessive or incorrect is on the appellant, see sections 67(5)(d) and 68(4).

28.  Section 69 provides that the decision of the Board shall be final, provided that the appellant or the Commissioner may make an application requiring the Board to state a case on a question of law for the opinion of the Court of First Instance.  Section 69A provides for a right of appeal directly to the Court of Appeal against a decision of the Board of Review in important, complex or substantial cases.  An application to state a case or an appeal to the Court of Appeal may not be entertained unless made within one month of the Board’s decision.

29.  Section 70 provides, insofar as material: “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 … profits … the assessment as made … shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable … profits”.

30.  Section 70A(1) provides: “Notwithstanding the provisions of section 70, if, upon application made within six years after the end of a year of assessment or within six months after the date on which the relative notice of assessment was served, whichever is the later, it is established to the satisfaction of an assessor that the tax charged for that year of assessment is excessive by reason of an error or omission in any return or statement submitted in respect thereof, or by reason of any arithmetical error or omission in the calculation of the amount of the … profits assessed …, the assessor shall correct such assessment …”.

31.  Section 70A(2) provides for the same rights of objection and appeal from a refusal to correct an assessment in accordance with an application under section 70A(1) as if the notice of refusal were a notice of assessment.

Correspondence between the liquidator and the Commissioner

32.  After the estimated assessment for the year of assessment 2005/2006 was raised on 25 November 2005, the liquidator wrote to the Commissioner on 30 November informing the latter of the alleged frauds committed by officers of Holdings under investigation, which might have included falsification of invoices for the purposes of overstating sales revenue and debtors.  The liquidator was of the opinion that the profits for the tax years ended 31 March 1999 to 31 March 2005 had been overstated with respect to Holdings, MGET and certain other companies in the Group. He stated that he was attempting to quantify the extent of the overstatement for the purposes of submitting revised returns to the Inland Revenue Department and seeking refunds of taxes that might have been overpaid as a result of misstatement in accounting records. As the task of reconstructing and restating the accounting records was significant and time-consuming, he sought the views of the Commissioner to the prospects of a reassessment of the returns for the years ended 31 March 1999 to 31 March 2005.

33.  The assessor replied on 20 December 2005 citing sections 70 and 70A. He stated that as no valid objection had been lodged for the years of assessment of 1998/1999 to 2004/2005 within the statutory objection period and there was also no error or omission in the returns submitted within the meaning of section 70A, the assessments for those years must be regarded as final and conclusive and no revision could be made.

34.  No objection to the refusal to correct an assessment was made within time by the liquidator as provided under section 70A(2).

35.  On 12 April 2006, the liquidator wrote to the Commissioner stating that preliminary investigations had indicated MGET might have been involved in a series of fraudulent transactions undertaken by the Group.  As a result, the liquidator was conducting a detailed investigation and reconstructing the accounts of MGET.  He sought an extension of time to submit profits tax returns for the years of assessment of 2004/2005 and 2005/2006 until he was in a position to do so.  The request was refused by the assessor on 26 April 2006. Further correspondence in this regard was exchanged in June 2006.  On 24 July 2006, the liquidator requested an extension of one year for filing the said returns due to the complexity and the large amount of information and accounting records required to be reviewed. On 2 August 2006, the Commissioner agreed to an extension up to 30 December 2006.  No tax returns for those two years have been submitted by the liquidator.

36.  On 7 June 2006, the liquidator wrote to creditors of MGET inviting submissions of proof of debt. The Commissioner filed the proof of debt in question on 15 August 2006.

37.  The liquidator wrote to the Commissioner on 18 January 2007 referring to the proof of debt and objecting to the assessments for each of the years from 2000 to 2006 on the basis they were calculated with the use of financial records supplied by the Company that misstated the Company’s true financial performance.

38.  By a notice of adjudication of proof dated 6 February 2007, the liquidator rejected the Commissioner’s proof.

39.  An assessor replied to the liquidator’s letter of 18 January on 7 February 2007 in similar terms to the letter of the earlier assessor on 20 December 2005, that the assessments must be regarded as final and conclusive and no revision could be made.

40.  The present summons to reverse the decision of the liquidator in rejecting the proof of debt was issued on 26 February 2007. By consent, the application was adjourned sine die with liberty to restore, to give time to the liquidator to conduct an extensive investigation exercise. Evidence in opposition was filed by the liquidator only in June 2009.

41.  On 29 March 2007, the liquidator wrote to the Commissioner repeating the request in his letter of 30 November 2005 that the Commissioner provide his views on the prospect of a reassessment of the returns for Holdings and MGET for the tax years ended 31 March 1999 to 31 March 2005.  He stated that for the avoidance of doubt, his letter and his previous letter of 30 November 2005 should be treated as an application pursuant to section 70A to correct an error in each of the years of assessment and/or as an application under section 64(1)(a) for an extension of time to object.

42.  The assessor replied on 16 April 2007 stating that his predecessor had duly replied to the letter of the liquidator dated 30 November 2005.

43.  I understand from Mr. Barlow, SC, who appeared for the liquidator, that the liquidator has since made a formal application under section 70A on 13 November 2009 and an initial response was received from the Commissioner on 4 December 2009.

The liquidator’s evidence

44.  All of MGET’s assets, with the exception of some unresolved litigation, have been realised. A total of HK$4.3 billion in creditors’ claims have been admitted. Dividends totalling 14 cents in the dollar have been distributed to the creditors. Any further dividend will largely depend on the outcome of various claims in pending litigation and the present application of the Commissioner.

45.  Given the scale of the liquidation of the Group and the widespread unsophisticated fraudulent transactions and accounting irregularities, coupled with the difficulties encountered by the liquidator in collecting relevant documents and information, it was not until recently that he has been able to get a clearer understanding of the fictitious transactions. By this time, the statutory time limits for filing an objection to the notices of assessment for the years of 1999/2000, 2001/2002 and 2002/2003 have already expired.

46.  Further, despite his best efforts, the liquidator has not been able to fully reconstruct a complete set of accounts for MGET. As a result, he has been unable to prepare and file tax return for the years of assessment of 2004/2005 and 2005/2006 and as no returns for these years have been filed, he is not able to lodge an objection to the estimated assessments.

47.  The liquidator’s investigation to date revealed three major financial areas impacted by false accounting in MGET’s accounts. These are:

(i)     fictitious sales: it was revealed that all sales to five major customers known as the “North American Debtors” dating back to 1999 and earlier were fictitious;

(ii)    cash advances: MGET’s accounts contained fictitious loans purportedly extended to unrelated third parties.  Consequently, the interest income purportedly generated on such loans was never earned by MGET; and

(iii)   frameboard space agreements: MGET’s accounts contained fictitious cash advances to customers to secure future sales to the relevant customers.  Consequently, the purported amortisation of the asset was also fictitious.

48.  The liquidator is of the view that the financial statements based on which the outstanding tax in question was computed were inaccurate and that if the effect of the false accounting entries were to be undone, it would be apparent that MGET in fact did not make any profits in the relevant years and therefore should not be liable to pay any profits tax.

49.  As mentioned earlier, any attempt to fully restate MGET’s financial accounts would take many years and be a very costly exercise.  For present purposes, to demonstrate the effect of the false accounting on MGET’s accounts, the liquidator has taken a more practical and cost-effective approach in creating a static model by reversing the effect of problematic entries to the financial statements at a particular point in time.  He has created such static model for the years ended 31 March 1998, 31 March 1999, 31 March 2000, 31 March 2001, 31 March 2002, 31 December 2002 (MGET changed the end of its financial years from March to December in 2002), 31 December 2003 and 31 December 2004. The objective of the exercise was to remove from the original unadjusted financial statements fictitious sales and settlement receipts that the liquidator was able to identify, as well as reversing the effect of tax payments made and provisions for tax in those years on the basis MGET did not make any profit in the relevant years and profits tax should not be chargeable.

50.  This process is not intended to represent a complete restatement of the true financial position for the relevant years but is merely to demonstrate the financial position should the effect of fictitious sales and settlement receipts be removed from the accounts. If the effect of all fictitious entries, such as fictitious loans, is reversed, the losses suffered by MGET for the relevant years will be much higher.

51.  The resultant adjustments showed that MGET did not make any profit during the years from 1998 to 2004, but had consistently made losses as stated below:

Year ended	Losses suffered (HK$)
31 March 1998	89,233,039
31 March 1999	77,427,888
31 March 2000	81,947,539
31 March 2001	208,425,247
31 March 2002	196,604,060
31 December 2002	221,077,315
31 December 2003	274,779,577
31 December 2004	272,647,686

52.  In respect of the year 2005, MGET ceased trading on 23 June 2005 when provisional liquidators were appointed, before any financial statements were finalised. Hence, the liquidator has not been able to carry out the same restatement exercise as for the previous years. According to the records kept in MGET’s accounting system as at 23 June 2005, MGET made a net loss of HK$191,018,823.91. The liquidator has not been able to verify the accuracy of such records.

53.  The liquidator is of the view that the exercise of reversing fictitious sales and settlement receipts and the profit and loss statements as at 23 June 2005 should sufficiently demonstrate for the purpose of tax assessment that MGET did not make any profits for 1998 to 2004 and therefore should not have been charged to profits tax.

54.  The assessor does not consider the estimates of the financial position of MGET as given by the static model reliable, he asserted they only provide a rough guide of the operating results. In any event, these estimates are irrelevant to the Commissioner’s contentions in this appeal.

The Commissioner’s contentions

55.  Mr. Beresford advanced three contentions on behalf of the Commissioner:

(1)    The assessments have become final and conclusive under section 70, as no or no valid objections were received by the Commissioner within the time limit in section 64(1).

(2)    Section 70A is not applicable, either because its own time limits have expired or because the conditions for correction do not exist or both.

(3)    The liquidator has no power to go behind the assessments in the liquidation as established under a long line of authorities.

56.  Mr. Barlow did not argue the contentions in (1) and (2), whilst making no concession as to their correctness. His submission was directed against (3). He contended that the liquidator did have power to go behind the assessments in adjudicating the proof of debt of the Commissioner, as estoppels deemed to exist by any other statute did not override the liquidator’s statutory duty to ensure that only the true liabilities of the Company are recognised and brought into the statutory trust estate for the true creditors of the Company. He submitted the real issue here is the interaction between the rights under Cap. 112 with the duties of a liquidator in adjudicating proofs of debt under the statutory scheme in a winding up. He pointed out the due dates of the tax demanded being the subject of the Commissioner’s proof were after the commencement of winding up, so these claims would be governed by the statutory scheme.

57.  As the contentions in (1) and (2) are not in issue in this appeal, I will try to deal with them succinctly before I turn to the only contention in (3).

If the assessments have become final and conclusive under section 70

58.  Mr. Beresford’s submission here is that since the Commissioner had never received from MGET or the liquidator any or any valid objection in respect of the additional assessments for the years of 1999/2000, 2001/2002 and 2002/2003 and the estimated assessments for the years of 2004/2005 and 2005/2006 within the one-month period stipulated under section 64(1), these assessments have become final and conclusive under section 70.

59.  As for an application for extension of time to lodge an objection under section 64(1)(a), the Commissioner has by an assessor deposed that the liquidator could have without difficulty lodged an objection within the one-month statutory period to the additional assessments for the years of 1999/2000, 2001/2002 and 2002/2003, and could have without difficulty lodged an objection within the one-month statutory period to the estimated assessments for the years of 2004/2005 and 2005/2006 and thereafter requested extension of time to submit the tax returns for those years.

60.  Mr. Barlow did not address the question about extension of time to lodge objections in his submission. His position is that this appeal is not governed by section 70 but by the companies legislation. He pointed out there is a fallacy in the Commissioner’s case as the Commissioner has failed to take account of these words in section 70 as italicised below:

“ … the assessment as made … shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable … profits …”.

61.  He submitted these words made clear there is no statutory deeming provision for the purposes of any other legislation, such as the Companies Ordinance or the Companies (Winding-up) Rules.

62.  I will come back to this submission when I deal with the third contention of the Commissioner. Leaving aside this submission for the time being, section 70 would appear to apply to the assessments, with the result that they have become final and conclusive unless there is some other statutory provision by which the assessments may be re-opened or that the liquidator is empowered to go behind them.

If section 70A is applicable

63.  Section 70A creates an exception to the finality and conclusiveness of assessments provided by section 70 and permits an assessor to correct errors and omissions. The time limit for an application under this provision is within six years after the end of a year of assessment, or within six months after the date on which the relative notice of assessment was served, whichever is the later.

64.  In the case of the years of assessment 1999/2000, 2001/2002 and 2002/2003, the six-year period expired on 31 March 2006, 31 March 2008 and 31 March 2009 respectively. The six-month period after the date of the notice of additional assessments in respect of each of these years expired on 28 February 2006.

65.  The liquidator contended by letter dated 29 March 2007 that his previous letter of 30 November 2005 should be treated as an application pursuant to section 70A to correct an error in each of the years of assessment. If that were the case, the application for the three additional assessments would be made within time.

66.  The time limit for application in respect of the estimated assessments for the years of 2004/2005 and 2005/2006 has not expired. However, the requirement in section 64(1)(b) has not been complied with as no return for these years has been submitted, notwithstanding the extension of time to file a return up to 30 December 2006.

67.  Mr. Beresford contended even if time for applying had not expired, the liquidator’s allegations of fraud would not bring the matter within the first condition for the application of section 70A, namely, error or omission in any return or statement submitted in respect of the tax charged. He relied on Extramoney Ltd. v. Commissioner of Inland Revenue [1997] HKLRD 387 in which the phrase of “error or omission” in this provision was considered by Patrick Chan J (as he then was). Whilst his lordship thought it unwise to attempt a comprehensive definition which can cater for all situations, he gave his views on what would not be an “error or omission” for this purpose at 396:

“In my view, for the purpose of s.70A, the meaning of ‘error’ given in the Oxford English Dictionary (p.277) would be appropriate, that is, ‘something incorrectly done through ignorance or inadvertence; a mistake’.  I do not think that a deliberate act in the sense of a conscientious choice of one out of two or more courses which subsequently turns out to be less than advantageous or which does not give the desired effect as previously hoped for can be regarded as an error within s.70A. It is even worse if the deliberate act is motivated by fraud or dishonesty. But the question of fraud or dishonesty need not arise.

Hence, in the context of the present case, if there is a change of opinion of the auditors or accountants in respect of the accounts, the first opinion cannot be regarded as an error or omission within the section. Similarly if there is a change of mind of the directors of the company in connection with how any part of the accounts should be made up, the previous decision will not be regarded as an error or omission. Nor is it an error or omission if it is merely a difference in the treatment of certain items in the accounts by those preparing or approving the accounts. If this were permitted, the director or officer of a company will be tempted at a later stage to try and ‘improve’ the company's accounts or change his own decisions if this is to his advantage.  This would be contrary to the spirit of the Ordinance that there should be finality in taxation matters. The whole statutory scheme provided in theOrdinance simply cannot work.”

68.  Mr. Barlow however relied on another part of the judgment immediately after the above extract, in which the judge had this to say:

“I accept that in some cases where it can be proved that the profits stated in the accounts of a taxpayer had in fact not been made, this may be sufficient to show that there has been an error justifying a correction in the assessment. However, each case must be considered in its own factual matrix.”

69.  In Extramoney Ltd., the evidence adduced showed that the profits in question had been made, although probably not by the taxpayer but were attributed as profits made by the taxpayer in the accounts. This was held to be a “deliberate and conscientious decision” of the persons having control of the affairs of the taxpayer. 

70.  It does not appear to me the dicta relied on by Mr. Barlow, read in the context of the entire judgment, would assist the liquidator’s argument. My tentative view is that the attributions of profits by and to the Company in the profits tax computation and revised computation of its former tax representative would seem to be deliberate and conscientious decisions.

71.  Mr. Beresford also submitted the liquidator’s allegations of fraud would not bring the matter within the second condition for the application of section 70A, namely, arithmetical error or omission in the calculation of the profits assessed, as this covers the case “where there has been a miscasting by the Assessor on the material available to him”, and does not cover the case where the assessment “does not coincide with a figure he would have reached had other information been available to him” (Sun Yau Investment Co. Ltd. v. Commissioner of Inland Revenue (1984) 2 HKTC 17, para. 6). Mr. Barlow did not contend otherwise.

72.  For the purpose of this appeal, it is not necessary to express a firm view on the applicability or otherwise of section 70A and I refrain from doing so. If the liquidator is right in his contention that the liquidator is empowered to go behind the assessments in the liquidation, section 70A would have no relevance. If the Commissioner is right in his contention the adjudication of a proof of debt does not give power to the liquidator to go behind a tax assessment and any challenge to the assessments could only be made within the framework of Cap. 112, the applicability of section 70A should be determined in the procedure laid down in Part XI of Cap. 112. As mentioned earlier, the liquidator has made a formal application under section 70A on 13 November 2009.

The liquidator’s contentions

73.  I turn to the primary submission of the liquidator. Mr. Barlow submitted it is necessary to fully recognise the true statutory role of a liquidator in the liquidation process, citing various dicta from Ayerst v. C. & K. (Construction) Ltd. [1976] AC 167 at 176E to 177E, per Lord Diplock; Re Lines Bros. Ltd. (In Liquidation) [1983] 1 Ch 1 at 20E to F, per Brightman LJ; Tanning Research Laboratories Inc. v. O’Brien (1990) 169 CLR 332 at 339 to 340, per Brennan and Dawson JJ; and Alan CW Tang v. John J Toohey, joint and several liquidator of Global March Ltd. [2005] 4 HKC 51, paras. 11 to 13, per Cheung JA.

74.  His arguments may be summarised as follows:

(1)     The making of a winding-up order brings into operation a statutory scheme for dealing with the assets of the company ordered to be wound up. The custody and control of all the property and choses in action of the company are transferred from the management to a liquidator charged with the statutory duty of dealing with the company’s assets in accordance with the statutory scheme. Any disposition of the property of the company otherwise than by the liquidator is void.

(2)     All powers of dealing with the company’s assets are exercisable by the liquidator for the benefit of those persons who are entitled to share in the proceeds of realisation of the assets under the statutory scheme. The company itself as a legal person, distinct from its members, can never be entitled to any part of the proceeds.

(3)     Although the principles which determine enforceability of the liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought directly against the company, this is subject to a qualification. As the parties whose interests are affected by the admission of a proof of debt are the general body of creditors and the contributories rather than the company in liquidation, there are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt if the liability, though enforceable against the company, is not a true liability of the company which unjustly prejudices the interests of true creditors or contributories in the assets available for distribution. In this respect, there is no reason to distinguish between the position of a liquidator and that of a trustee in bankruptcy.

(4)     When the liquidator examines a proof of debt for the purpose of admitting or rejecting it, he has the right and duty to require satisfactory evidence from the applicant that the debt on which the proof is founded is a real debt due to the applicant. No judgment recovered against the company, no covenant given by or account stated with the company, could deprive the liquidator of this right. He is entitled to go behind such forms to get at the truth.

(5)     The occasions when it is right to reject a proof of debt in respect of what is not a true liability of the company may not be susceptible of exhaustive definition.

75.  There is no dispute as to the correctness of the above propositions which contained general principles of law. The question is how these principles might be applied to the present situation.

76.  Mr. Barlow contended the role of the liquidator in adjudicating a proof of debt transcends the legal rights of the Commissioner under Cap. 112 and the liquidator may disregard statutory estoppels under Cap. 112 to ensure that only the true liabilities of the Company are recognised and brought into the statutory trust estate for the true creditors of the Company. Hence, the liquidator has a duty to reject the Commissioner’s proof for alleged statutory debts in respect of trading profits which are known or are likely to be fictitious because of fraudulent misconduct of the Company’s former officers. He argued there is no authority directly on this point.

77.  Mr. Beresford argued to the contrary. He submitted there was a long line of authorities, commencing with In re Calvert, ex parte Calvert [1899] 2 QB 145, which established that where a statutory procedure was laid down for considering objections and appeals against assessments to tax, the right way for the liquidator to challenge the assessment was by such procedure, not by rejection of a proof of debt in the liquidation.

If the liquidator has power to go behind the assessments in the liquidation

78.  In In re Calvert, the debtor who had lodged a scheme of arrangement applied to expunge a proof of debt submitted by the Inland Revenue based on an assessment to income tax. He did not appeal against the assessment or make any objection. In support of his application to expunge the proof against his estate, he filed an affidavit stating that he had made no profits assessable to tax. It was submitted on his behalf the bankruptcy court could always go behind a judgment and ascertain whether or not there was a real debt and the same rule should apply to the assessment for taxes, although there was no authority on the point.

79.  The judgment of Wright J was very short. I will set this out in full in view of its importance to the parties’ contentions:

“It seems to me that this assessment is not like a judgment, nor within the principle which is applied to judgments. It is absolutely necessary in order to prevent fraudulent proofs and fraudulent bankruptcies to adopt the rule that judgments should not of themselves be conclusive.  That rule appears to be founded on necessity.  Here there is no such necessity. It is quite inconceivable that a man should act in the way that is suggested he might act in order to spite his creditors.  But if he did, I am not sure that the bankruptcy law is not strong enough to reach the case within certain limits of time – possibly as a fraudulent preference of the Crown.  If not within those limits of time, I should think very likely on common law principles it might be possible for the Court to deal with the matter. In the case of an assessment there is no question of consideration as there is in the case of a judgment: there is a mere administrative assessment with a special mode of appeal provided which must be followed.  I cannot think it possible that it is competent to the Bankruptcy Court, on the invitation of the trustee in bankruptcy or of the debtor, to reopen questions of that kind on a motion to expunge.  It is quite impossible to conceive that it would be competent for me sitting here to go into the question of the rateable values of a union or of a parish, or any question of that sort.  That seems to me to be a case which is analogous to the case in which I am at present invited to act. I think the application fails, and must be dismissed with costs; but my decision will not interfere with any application the debtor may be advised to make to the Inland Revenue under the Board of Trade Regulations of May, 1888.”

80.  Mr. Barlow sought to distinguish this decision, which, he said, was correct on its facts. He submitted the application was not made in the liquidation of a company, nor was it made by a liquidator in the adjudication of a proof of debt, but was made by the debtor to expunge a proof against his estate in a bankruptcy. I do not think these are relevant considerations. A similar attempt to distinguish In re Calvert was made in In re Quinlan [1928] IR 548, and was rejected by Johnston J at 550. According to the authorities cited by Mr. Barlow as mentioned earlier, there is no reason to distinguish between the position of a liquidator and that of a trustee in bankruptcy in the right and duty of the office holder in examining a proof of debt. In his judgment, Wright J was considering if it would be right in principle for the bankruptcy court to reopen a tax assessment whether “on the invitation of the trustee in bankruptcy or of the debtor”. The fact that the application was made by the debtor was immaterial.

81.  What matters in my view is the reasoning in the judgment for refusing to reopen the tax assessment. Wright J was of the view there was no necessity for the bankruptcy court to reopen questions of that kind, as there was legislation providing for a special mode of appeal “which must be followed”. He expressly stated his dismissal of the application would not interfere with any application the debtor might be advised to make to the Inland Revenue under the correct statutory procedure. 

82.  In re Calvert was followed in a number of decisions.

83.  In In re Quinlan, supra., the Supreme Court of Ireland affirmed the judgment of Johnston J that assessments for income tax made upon a person who was adjudged bankrupt and from which no appeal had been taken could not be questioned by the Official Assignee upon proof of debts, and the Revenue Commissioners could not be called upon to prove that the amounts assessed were just and proper, having regard to the bankrupt’s income at the material times, the assessments being, in default of appeal, final and conclusive under the tax legislation. A construction could not be placed on the final and conclusive provision in the tax legislation which would make the assessment not binding on the Official Assignee, although binding on the bankrupt (at 554). Johnston J had considered a number of decisions dealing with the power of the bankruptcy court to go behind a judgment, a covenant given by or an account stated with the debtor. He was of the view that Wright J’s decision was given “with a due regard for, and a proper appreciation of, the principle of the earlier decisions.” Like Wright J, he stated his decision was “of course without prejudice to any application that may be made for an extension of time to appeal from the assessments” (at 551).

84.  It seems to me In re Quinlan is squarely on the issue I am concerned with in this appeal.

85.  In Re Ayr Picture Houses Ltd. (In Liquidation) (1928) 13 TC 675, a claim was lodged by the Commissioners of Inland Revenue for preferential ranking for income tax assessed. The liquidator rejected the claim on the ground it was not admissible by virtue of tax relief under the income tax legislation. It was held by the Court of Session in Scotland that the liquidator was not entitled to decide for himself whether the taxpayer was entitled to the benefit of tax relief, consideration of the liquidator’s deliverance was therefore postponed until the General Commissioners of Income Tax should have dealt with an application by the liquidator for tax relief.

86.  The taxpayer in Commissioners of Inland Revenue v. Pearlberg [1953] 1 WLR 331 did not appeal against the assessment within the statutory period. When the Inland Revenue Commissioners brought an action against him in the High Court to recover the tax assessed, he sought to contest the assessment for the first time and to adduce evidence that he was not chargeable to the tax. His appeal against the judgment in the Commissioner’s favour was dismissed by the English Court of Appeal. It was held that the right way for him to challenge the assessment was by appeal to the Commissioners in the manner provided by the Income Tax Acts and if there had been no appeal to the Commissioners and the debts became absolute and conclusive, their legal effect could not be denied.

87.  Similarly, in In re Moschi, ex parte Moschi (1953) 35 TC 92, Danckwerts J held, in an application to annul the adjudication of the bankrupt, it was not open to the bankrupt to claim that the tax assessments should be reopened. He rejected the argument the bankruptcy court should have power to enter into a consideration of the facts upon which the assessment was founded and to reopen the matter. He applied the principles in In re Calvert. A more recent case of similar effect was Cullinane v. Commissioners of Inland Revenue [2000] BPIR 996.

88.  The House of Lords in In re Vandervell’s Trusts [1971] AC 912 was concerned with the question whether it would be appropriate to join the Inland Revenue Commissioners as defendants to the litigation between the executors of the deceased’s will and the trustees of a family settlement made by the deceased. Lord Wilberforce at 938G to 939B referred to Barraclough v. Brown [1897] AC 615 for the proposition that “where the legislature has by statute laid down a special procedure for the determination of any question, that special procedure is the only method by which such a question can be determined: and the ordinary jurisdiction of the courts is excluded.” He went on to say at 939C to F:

“In order to compare (in fact to contrast) the situation under the Income Tax Acts, it is necessary to see precisely what it is that under that legislation has been made the subject of the statutory procedure.  This is the validity and quantum of the assessment to tax which has been made on the subject.  It is this which, when made, is the subject of appeal to the special commissioners under section 52 (5) of the Income Tax Act 1952, and section 12(5) of the Income Tax Management Act 1964; it is the assessment which cannot be altered except in accordance with the Income Tax Acts (Income Tax Management Act 1964, section 5) and which ultimately becomes final and conclusive.  All this is undoubted and, if necessary, the authority of Barraclough v. Brown could be invoked to show that the High Court cannot interfere with assessments.  But this is not sufficient to make good the appellants' argument.  In any but the simplest of cases of assessment to tax there may arise questions of fact or of law which have to be decided. The special commissioners can decide them.  They may do so after examination of the appellant, or by other lawful evidence (Income Tax Act 1952, section 52 (5)).  But I see no reason why, if there is consent between the taxpayer and the revenue, these questions should not be settled by agreement, by arbitration or even by decision of the court, whether before or after an assessment has been made, provided of course, that it has not become final after appeal, or after the time for appeal has expired.”

89.  The dicta of Lord Wilberforce were discussed by Lord Nicholls in Autologic Holdings plc v. Inland Revenue Commissioners [2006] 1 AC 118 at 125G to 126D:

“12. Clearly the purpose intended to be achieved by this elaborate, long established statutory scheme would be defeated if it were open to a taxpayer to leave undisturbed an assessment with which he is dissatisfied and adopt the expedient of applying to the High Court for a declaration of how much tax he owes and, if he has already paid the tax, an order for repayment of the amount he claims was wrongly assessed.  In substance, although not in form, that would be an appeal against an assessment.  In such a case the effect of the relief sought in the High Court, if granted, would be to negative an assessment otherwise than in accordance with the statutory code.  Thus in such a case the High Court proceedings will be struck out as an abuse of the court's process.  The proceedings would be an abuse because the dispute presented to the court for decision would be a dispute Parliament has assigned for resolution exclusively to a specialist tribunal. The dissatisfied taxpayer should have recourse to the appeal procedure provided by Parliament.  He should follow the statutory route.”

“14. In Vandervell's case [1971] AC 912, 939-940, Lord Wilberforce sought to clarify the limits of this ‘exclusivity’ principle.  This principle, he said, is not to be taken to exclude the jurisdiction of the courts to decide a question of fact or law which is a basis for an income tax assessment where the taxpayer and the revenue so agree, provided the assessment to which the question relates has not become final and provided also the question, ‘in form suitable for decision by the court’, is not ‘so close to the question of the assessment itself’ that the court should decline to entertain it.  But Lord Wilberforce was at pains to add that either the taxpayer or the revenue have the right to insist the statutory procedure should be followed.”

90.  Mr. Beresford relied on the above dicta for the proposition that where the assessments have become final and conclusive, they cannot be altered except in accordance with the special procedure in Cap. 112, which is the only method by which assessments can be reopened, otherwise the statutory scheme would be defeated.

91.  Commonwealth v. Duncan [1981] VR 879 was another instance in which the court upheld the principle that as the only way in which an assessment for tax could be challenged was under the appeal provisions of the tax legislation, the validity of the assessment could not be challenged by any other procedure in any court. By the conclusive evidence provision in the tax legislation, the liquidator was precluded from rejecting the proof of debt of the Commissioner of Taxation.

92.  The latest decisions in this long line of authorities were Lam v. Inland Revenue Commissioners [2006] STC 893 and Worby v. Inland Revenue Commissioners [2005] BPIR 1249. Both were appeals against bankruptcy orders made on petition presented by the Revenue based on the debt due in respect of unpaid assessments to tax. In Lam, the bankrupt challenged the assessments on the ground that they were incorrect in that the profits were not made by him but by a limited company of which he was an employee. In Worby, the assessments were challenged on, among other grounds, that certain accounts put to the Revenue on the bankrupt’s behalf were false in relation to his business. Both appeals were dismissed. In Lam, Blackburne J reiterated it was well established that Parliament had provided clear and exclusive machinery for considering appeals against assessments to tax and it was not open to the bankruptcy court to go behind the assessments and review the manner in which they were made, much less to investigate the merits of the assessments, save in exceptional circumstances such as where there was evidence “the assessments had been made in some fraudulent or collusive way, or there was some other glaring miscarriage of justice” (at paras. [12] and [13]).

93.  Mr. Barlow placed reliance on Attorney General v. Chino Industries Ltd. [1997] HKLRD 833. Le Pichon J (as she then was) upheld the liquidator’s rejection of part of the proof of debt submitted by the Commissioner of Inland Revenue. Her ladyship did not question the authority of In re Calvert but distinguished it on the basis that “the assessment to provisional tax has been rendered a nullity by subsequent events, namely, the Revenue’s acceptance that no assessable profits arose in 1988/89. That is wholly different from the re-opening of assessments which Wright J had in mind in In re Calvert” (at 839C to D). I cannot see how this case would assist the liquidator. Nor do I think the present situation would come within the exceptional circumstances envisaged in Lam v. Inland Revenue Commissioners. The fact remains that clear and exclusive machinery has been laid down by the legislature to deal with objections and appeals against assessments to tax. I am not persuaded there is any valid reason why this procedure should not be followed. The finality of the assessments was in the hands of the liquidator. I do not agree with Mr. Barlow the liquidator here would not be able to perform his statutory duty to ensure that distribution of available assets would be made to true creditors. I see no conflict between this statutory duty and the application of the principle in In re Calvert. As Mr. Beresford had submitted, once an assessment has become final and conclusive, it is a true liability of the taxpayer as a matter of substance and not merely a procedural estoppel.

94.  I accept the submission of Mr. Beresford. The liquidator’s rejection of the Commissioner’s proof of debt would undermine the principles of finality and jurisdiction in relation to tax assessments established in a long line of authorities. I hold that the liquidator is not entitled to go behind the assessments in the liquidation.

95.  It is not necessary for me to consider Mr. Beresford’s submission on the principle of ex turpi causa, namely that it would not be open to MGET, through the liquidator, to resist the assessments by setting up its own wrong or relying upon an illegality as a defence to the Commissioner’s claim.

Conclusion and orders

96.  I would allow the Commissioner’s appeal and reverse the liquidator’s decision in rejecting the proof of debt. I order the proof to be admitted in full. This is without prejudice to any application that has been brought or may be brought by the liquidator to challenge the assessments in accordance with the procedure laid down in Cap. 112.

97.  I make an order nisi that the Commissioner’s costs in this appeal are to be met out of the estate of the Company and that the liquidator’s costs are to be costs in the liquidation.