THE COMMISSIONER OF INLAND REVENUE v. MAPLE RIDGE HOLDINGS LTD

DCTC 701/2016

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO.701 OF 2016

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REASONS FOR DECISION

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1.  This is another reminder that outstanding time summons is no bar to entry of default judgment.

2.  On 26 Jan 2017, I heard 2 summonses both taken out by defendant. One was summons filed 24 Oct 2016 for time extension to file and serve defence (“time summons”) and the other was summons filed 14 Nov 2016 (“setting aside summons”) to set aside default judgment entered in default of defence on 25 Oct 2016 (“default judgment”). I dismissed both summonses with costs to plaintiff and now I give my reasons.

Background

3.  On 14 Jul 2016, plaintiff issued writ of summons endorsed with statement of claim against defendant claiming $2M odd being tax due and payable under s.75 of the Inland Revenue Ordinance, Cap.112 (“IRO”) in respect of which the defendant is in default.

4.  The particulars given are 3 profit tax final assessments for financial years 2012/13, 2013/14 and 2014/15 (the last assessment was accompanied with profit tax provisional assessment for financial year 2015/16) respectively due on the 3 dates of 10 Apr 2015, 13 Apr 2015 and 18 Feb 2016.

5.  On 8 Aug 2016, acknowledgment of service was filed on behalf of defendant by defendant’s solicitors, indicating that the proceedings will be contested.

6.  On 1 Sep 2016, by consent summons, Master S.P. Yip extended time for defendant to file and serve defence to 26 Sept 2016.

7.  On 21 Sept 2016, plaintiff gave defendant’s solicitors written notice of intention to enter default judgment pursuant to O.19 r.8A of the Rules of District Court, Cap.336H (“RDC”).

8.  On 28 Sept 2016, by consent, Master M. Lam again extended time for defendant to file and serve defence to 24 Oct 2016 (“2^nd extension”).

9.  On 20 Oct 2016, defendant’s solicitors wrote to plaintiff seeking 28 more days to file and serve defence.

10.  On the same day i.e. 20 Oct 2016, plaintiff wrote back defendant’s solicitors rejecting further time extension sought for filing defence.

11.  On the deadline of the 2^nd extension i.e. on 24 Oct 2016, the time summons was filed by defendant. No time abridgement for its service was sought. It was only returnable on 15 Nov 2016 before Registrar Lui in chambers.

12.  On the next day i.e. 25 Oct 2016, the default judgment was entered by plaintiff.

13.  On 14 Nov 2016, the setting aside summons was filed by defendant.

Evidence

14.  In support of the 2 summonses before me, Mr Chu Hei Chun (“Chu”), an assistant solicitor of defendant’s solicitors, filed his 1^st and 3^rd affirmations on 14 Nov 2016 and 10 Jan 2017. A draft defence (“draft defence”) settled by Mr Joseph Wong of counsel (“Mr Wong”) appearing for defendant before me was exhibited as “CHC-6” in Chu’s 1^st affirmation.

15.  Some defendants’ correspondences with plaintiff and even with third parties not exhibited to any affirmation were put in hearing bundle and Mr Wong fairly agreed that they are inadmissible.

16.  In opposition to the summonses, Ms Sien Yuk-sheung (“Sien”), an assessor of plaintiff, filed an affirmation on 12 Dec 2016. Ms Katherine Chan, Government Counsel of the Department of Justice(“Ms Chan”), appeared for the plaintiff before me.

Defendant’s submissions

17.  Mr Wong submitted this court should first decide thetimesummons, whose decision would dispose of the setting aside summons. An overall assessment of justice in all the circumstance of this case demands, he submitted, that further time be granted to defendant such that the default judgment should also be set aside.

18.  Should this court first decide the setting aside summons, he submitted that the default judgment is an irregular judgment such that it ought to be set aside as of right without going into the merits of the draft defence.

19.  The default judgment was an irregular judgment as plaintiff, submitted Mr Wong, was guilty of material non-disclosure to the court of the filing of the time summons during plaintiff’s ex parte application for the default judgment.

20.  If, however, the default judgment is a regular one, Mr Wong alternatively submitted that the defendant has ameritorious defence to plaintiff’s claim in that, by reason of depreciation allowances defendant was entitled to, had claimed but rejected by plaintiff, there should either be no tax due from, or tax refund to, the defendant for two of the subject financial years.

Plaintiff’s submissions

21.  Ms Chan submitted that, by reason of the entry of the default judgment, this court should first decide on the setting aside summons, whose decision would also dispose of the time summons.

22.  Next, it is submitted by her that the default judgment is a regular judgment. It was entered in compliance with the RDC. At law, an outstanding time summons does not stop time running or prevent entry of default judgment. And no duty was owed by plaintiff to disclose to the court of the filing of the outstanding time summons and plaintiff could not be in breach thereof.

23.  The default judgment being a regular one, Ms Chan went on to submit that the draft defence disclosed no meritorious defence. Such objections raised therein to subject profit tax assessments cannot, she said, be taken in captioned enforcement proceedings by reason of s.75(4) of IRO as they ought to be pursued by defendant separately by way of objection and appeal under other provisions of IRO.

24.  As such, the default judgment should, she submitted, not be set aside and both summonses should be dismissed.

Analysis

25.  I have full and carefully considered all evidence, submissions and authorities put before me by both parties.

First decide setting aside summons

26.  Mr Wong first referred me to trite O.3 r.5 principles set out in Costellow v Somerset County Council [1993] 1 WLR 256, 264H, by Sir Thomas Bingham MR (as he then was) who also gave guidance as to how to deal with cross applications for time extension and striking-out. They are said to be adopted locally by Hartman J (as he then was) in Mobile Petroleum Co Inc v Registrar of Trade Marks [2001] 1 HKLRD 225 and referred to by Ma J. (as he then was) in Shindler Lifts (HK) Ltd v Ocean Joy Investments Ltd [2002] 1 HKLRD 279, 284H.

27.  Ma J. (as he then was) at para 19 of Schinder Lifts, supra, found it logical, Mr Wong stressed, to consider the time extension before his lordship first “because if an extension is given, the application for default judgment falls away. On the other hand, if the application for default judgment were first to be dealt with and then granted, the defendant would have to set aside this judgment, in accordance with the usual principles, before an extension of time could be considered. This would be potentially time-consuming and inefficient.”

28.  In first considering the time summons, Mr Wong emphasized, among others, that there was only short delay. No unless order was breached at all. There was also justifiable reason for time extension in view of lack of documents on the part of defendant’s solicitors. And there were difficult points of law involved. The draft defence is now ready to be filed. No prejudice is to be suffered by plaintiff which cannot be compensated by costs. And Chu had also referred the same at para 19 to 27 of his affirmation. The overall justice in all circumstances of the case, he submitted, demands a short 3^rd extension be allowed with an unless order made if necessary.

29.  I am afraid I do not accept Mr Wong’s submissions above.

30.  I agree with Ms Chan that this court should first decide the setting aside summons. That would dispose of the time summons as well. If I decide to set aside the default judgment, consequential directions including necessary time extension for filing defence will also be granted by this court.

31.  Costellow, supra, cited by Mr Wong, I must point out, dealt with cross applications. The same applied to Schinder Lifts, supra, where there was an application for default judgment by plaintiff, and an application for time extension by defendant. Instead, I am dealing with 2 summonses both taken out by defendant.

32.  Significantly, in Schinder Lifts, supra, there was an actual hearing of plaintiff’s application for default judgment with both parties present before Master Cannon, who adjourned it to be heard together with defendant’s application for time. And both applications came before Ma J. (as he then was) without any default judgment entered: see para 6 & 18 of the judgment. It was against such peculiar background that his lordship first decided the time extension.

33.  In the event of a default judgment already granted, which is our case here, as Ma J. (as he then was) said at latter part of para 19 of his judgment of Schinder Lifts, supra, a defendant would have to set aside the judgment, in accordance with the usual principles, before an extension of time could be considered and this, I hold, is the proper approach to be adopted here.

Principles on default judgment

34.  For setting aside regular judgments, the first consideration is whether there is a defence on the merits. It is not enough to show an arguable defence. A defendant must show a defence with real prospect of success. At the same time, all the relevant circumstances must also be considered: Premier Fashion Wears Ltd. and Another v Li Hing-chung and Another [1994] 1 HKLR 377.

35.  For irregular judgments, they are liable to be set aside as of right without going into the merits of the defence, though the courts have a residual discretion to impose terms as to the setting aside having regard to the conducts of the defendant: Po Kwong Marble Factory Ltd v Wah Yee Decoration Co Ltd [1996] 4 HKC 157.

RDC compliance

36.  There is no suggestion that the default judgment was entered in breach of any RDC. It was not “premature” as it was entered on 25 Oct 2016, the day after expiry of the 2^nd extension deadline of 24 Oct 2016. Notice of intention to enter default judgment had also been served by plaintiff beforehand.

Time summons no bar to default judgment

37.  By letter dated 1 Nov 2016[1], defendant’s solicitors wrote and complained to Mr Wong Chi Wai, Senior Tax Inspector of the plaintiff (“Wong”), that the default judgment was obtained “prematurely” as it was entered after the time summons was taken out returnable on 15 Nov 2016. Chu took the same view at para 18 of his affirmation. That, with respect, is wrong at law.

38.  An application for extension of time will not stop time running and will not prevent a plaintiff from entering default judgment: para 10 of Schinder Lifts, supra, citing GP Vickers & Co Ltd v Humanbo Enterprises Ltd, unreported, HCA 12076/1983, 16 Jan 1984, where Power J. (as he then was) said at p.3 of his judgment:

“It seems to me that Mr Ma is quite correct in this submission that there can be no question that there is any automatic stay. It rests upon a person who is applying for an extension of time to safe-guard himself by making an application for a stay and asking that it be heard forthwith if he is already out of time. If this is not done, there is no stay in existence and any judgment that is entered before the hearing of the summons asking to extend the time is a regular judgment”.

39.  In Ng Ngon Kwan Stephen v Hideaki Minami & Another, unreported, DCCJ 989/2001, 15 Nov 2001, H. H. Judge Andrew Cheung (as he then was) also gave his understanding of the position of the rules at para 9 of the judgment as follows:

“...strictly speaking, the taking out of a time summons is neither here nor there, and it will not per se prevent the entry of a default judgment against a defendant after the expiry of the time fixed for the filing of a defence. Nothing short of a court order either granting an interim stay of proceedings pending the outcome of the application for time under the time summons, or an actual extension of time for the filing of defence would, in my view, prevent the entry of a default judgment against the defendant upon an application by the plaintiff made after the expiry of the time fixed for the filing of a defence...”

40.  Granted that there was no interim stay or actual time extension obtained prior to the entry of the default judgment, Mr Wong accepted on the above authorities that the plaintiff is entitled to present the default judgment for entry notwithstanding that the time summons was outstanding to be heard.

No material non-disclosure

41.  Mr Wong however submitted that the plaintiff is not entitled to present the default judgment for entry without disclosing the fact to the court that the time summons was outstanding, when the application was done on an ex parte basis. Had the court known about it, he submitted it could have refused entry of the default judgment or expedited the hearing of the time summons.  The exact reaction of the court is, he said, neither nor there but it is important that the court be told.

42.  For reasons below, I also disagree with this submission from Mr Wong.

43.  As a matter of evidence, the plaintiff filed its draft default judgment signed by Wong on behalf of the plaintiff into court for entry in the morning of 25 Oct 2016 prior to the receipt by Wong of the time summons at 0935 hours on 25 Oct 2016: see para 10 of Sien’s affirmation and the 2 exhibits “SYS-4” and “SYS-5”.

44.  In other words, when the plaintiff presented the draft default judgment for approval and sealing, it did not at that time know about filing of the times summons the day before or that there was the time summons returnable on 15 Nov 2016. It could not then fail to disclose something that it did not know yet.

45.  In view of the above, Mr Wong turned to submit that the plaintiff continued to be under a duty to disclose the pending time summons to the court after it had presented the draft default judgment to the court and before it was approved.

46.  But the foremost difficulty with Mr Wong’s submissions is, I think, that he cannot find any authority, be it rules in the RDC, practice direction or case authorities, in support of such alleged duty of disclosure on the part of plaintiff, save to point to the fact that the application for default judgment in this case was made ex parte.

47.  Giving the matter careful consideration, I do not believe such alleged duty exists at all. Had it existed at all, I would have thought it should find its way into the RDC, such as O.13, r.7(3) - (5), practice direction or, at the very least, case authorities but none was found by Mr Wong at all.

48.  Moreover, given that the taking out of a time summons is neither nor there, and that it would not per se prevent the entry of default judgment against a defendant, it ought, I think, in principles not to be a material matter to be considered by (or disclosed to) the court on an application for default judgment, albeit done ex parte.

49.  In this respect, while H. H. Judge Andrew Cheung (as he then was) put it as “a general understanding of the effect of the rules” at para 10 of Ng Ngon Kwan Stephen, supra, that the proposition that “the court has no discretion to refuse the entry of a default judgment against a defendant upon the application by a plaintiff” would “seem to be correct” but did not decide this point at para 11 thereof, I would decide it and give the same answer his Honour suggested.

50.  Were I wrong on the above, the filing of a time summons is not, I think, a matter within peculiar knowledge of applicant for default judgment but that of the opposite defaulting party (until the summons is served on the applicant) and the court. The applicant cannot, I think, be expected or required to disclose something not within its own knowledge or that already within the court’s knowledge.

51.  For the above reasons, Mr Wong’s submission of material non-disclosure fails and I hold the default judgment entered by plaintiff a regular one, whose setting aside primarily requires a defence with reasonable prospect of success.

Draft defence

52.  As explained by Mr Wong and as outlined in the draft defence, the defendant had spent $8.5M odd to purchase plants and machineries in around 2012 and provided the same to its PRC subcontractor company to use in its manufacturing process and to save it from further sub-contracting.

53.  In July 2013 and Aug 2014, in submitting its profit tax computations for the two financial years 2012/13 and 2013/14 to the plaintiff, defendant claimed initial and annual depreciation allowance totaling $5.7M odd and $2.1M odd respectively resulting from aforesaid acquisition of fixed assets in 2012. In Feb 2015, the plaintiff by letter rejected these claims and the subject 2 profit tax assessments were issued with these claims disallowed.

54.  The draft defence goes on to plead, on proper statutory interpretation of various IRO provisions, such aforesaid purchase and arrangement did not fall into definition of “lease” under IRO as defendant and the subcontractor were in substance alter ego of one Mr Lin, the sole or majority shareholder of both. The IRO definition of “lease” did not apply in this case due to the said different context and a wider definition should, it is said, apply.

55.  The aforesaid plant and machineries, it was pleaded, were thus not the subject of a lease and not “excluded fixed assets” under IRO and the defendant is thus entitled to depreciation allowances of $5.7M odd and $2.1M odd for the two financial years of 2012/13 and 2013/14 respectively. Hence, plaintiff’s claim is denied.

56.  In support of such argument raised in the draft defence, Mr Wong cited before me the Court of Appeal decision in Braitrim (Far East) Ltd v CIR [2013] 4 HKLRD 329 where the definition of “lease” for purpose of depreciation allowance in IRO was interpreted in another different set of facts.

57.  In so far the plaintiff relying on s.75(4) of IRO to argue that this court shall not entertain any plea that the tax due is “excessive” or “incorrect”, Mr Wong argued that defendant’s case falls outside such jurisdictional restriction as there would be no tax payable by, or tax refund to, the defendant if the claimed depreciation allowances in the draft defence are allowed.

Objections not open in enforcement proceedings

58.  S.75 of IRO reads:

“(1)  Tax due and payable under this Ordinance shall be recoverable as a civil debt due to the Government.

(2)  Whenever any person makes default in payment of tax the Commissioner may recover the same by action in the District Court notwithstanding that the amount is in excess of the sum mentioned in section 33 of the District Court Ordinance (Cap.336).

...

(4)  In proceedings under this section for the recovery of tax the court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal...”

59.  In opposition to the draft defence, Ms Chan relied on a long line of authorities to the effect that such pleas in s.75(4) above cannot be entertained by this court in enforcement proceedings against taxpayer, who should pursue separate proceedings for objections and appeal under other provisions of IRO: CIR v Au Yuk-shuet (1966) 1 HKTC 489; Ng Chun-kwan v CIR [1976] HKLR 94 and CIR v Choy Sau Kam (1983) 2 HKTC 10.

60.  Despite the ingenuity of Mr Wong’s argument at para 57 above, I reject it and agree with the submission of Ms Chan above.

61.  As Pickering D.J. (as he then was) found an argument that “no liability whatever attached to a defendant for tax” is merely another way of saying that the tax is “excessive or incorrect” at p.493 of Au Yuk-shuet, supra, I equally find the contentions in the draft defence merely another way of saying that the subject profit tax assessments on defendant were “excessive or incorrect”.

62.  The fact that the subject 3 profit tax assessments on defendant were belatedly “subject to objection” on 9 Jan 2017 as Chu said at para 8 of his 3^rd affirmation is equally, I think, precluded by s.75(4) of IRO. Accordingly, whatever merits the contentions in the draft defence might have, they cannot be relied upon in captioned enforcement proceedings brought by plaintiff to recover tax due.

63.  As such, the draft defence does not afford a defence with reasonable prospect of success to the defendant. All things before me considered and balanced, I do not see fit to set aside the regular default judgment entered by plaintiff in this case.

Disposition

64.  Accordingly, I dismissed both summonses before me.

Costs

65.  Ms Chan applied for costs on both summonses and suggested summary assessment of the same. With no objection from Mr Wong, I acceded to her application and suggestion.

66.  Taking a broad brush approach to the statement of costs submitted before me, I ordered defendant to pay plaintiff costs of both summonses summarily assessed at a total sum of $25,000.

67.  It remains for me to thank Ms Chan and Mr Wong for their assistance.