OSMAN MOHAMMED ARAB AND WONG TAK MAN STEPHEN, JOINT AND SEVERAL LIQUIDATORS OF AGI LOGISTICS (HONG KONG) LTD (In Compulsory Liquidation) v. COMMISSIONER OF INLAND REVENUE

HCCW 704/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 704 2009

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D E C I S I O N

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1.  This is the application of the liquidators (“Liquidators”) of AGI Logistics (Hong Kong) Ltd (“Company”) by way of a summons dated 29 January 2015 (“Summons”) applying for :

(a) a declaration that the payment of a sum of HK$549,600 (“Tax Refund”) by the Commissioner of Inland Revenue (“CIR”) to Careship International Transportation Ltd (“Careship”) on 27 January 2010 after the commencement of the winding up of the Company is void under s 182 (“S 182”) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32;

(b) an order that the CIR pay the sum of HK$549,600 to the Liquidators.

2.  The Tax Refund was the result of a re-assessment of the estimated profits tax payable by the Company for the assessment year 2008/09.  Pursuant to the re-assessment, excess tax paid by the Company had to be refunded.  However, the Tax Refund was paid, under the directions of the sole director of the Company (“Ke”), to Careship by the CIR at a time when the assessor who handled this matter (“Assessor”) was aware that a petition for the Company’s winding up was presented and gazetted.

3.  The arguments in this application fall within a narrow compass.  Most importantly, it is accepted by the CIR that this court is bound by 2 Court of Appeal authorities on the application of S 182 to the payment of the Tax Refund to Careship, which rendered such payment void. 

4.  The arguments are therefore confined to 2 points :

(1) whether the Liquidators should exhaust their remedies against Careship before making a claim against the CIR;

(2) If this court grants a declaration that the payment to Careship is void pursuant to S 182, whether the Liquidators are entitled to enforce the right to a refund under s 79 (“S 79”) of the Inland Revenue Ordinance, Cap 112 (“IRO”) without having made a claim thereunder. Such a claim is now out of time.

Background

5.  The factual background is not in dispute and can be succinctly stated by way of a chronology[1] as follows : 

12.10.2009	The Company’s tax representative submitted a Notice of Objection to the Inland Revenue Department (“IRD”)’s estimated tax assessment for 2008/09 and for 2009/10 (provisional)
8.12.2009	Hang Seng Bank Ltd presented a petition to wind up the Company (“Petition”)
16.12.2009	Ke wrote to the IRD emphasising severe cash flow difficulties of the Company due to bad debts and the global financial crisis and requested IRD to consider the audited financial statements of the Company for the year ended 31.12.2008 despite its late filing
31.12.2009	Notice of Petition published in Gazette No. 53/2009 (“Gazette”)
6.1.2010	Copy of the Gazette provided to the Assessing Group of the IRD for their urgent attention
12.1.2010	The IRD issued a Notice of Revised Assessment and Refund of Tax (“Notice”), pursuant to which the Company’s objection was allowed and the sum of HK$549,600 was assessed to be the net tax repayable to the Company A cheque, payable to the Company, for the Tax Refund was attached to the Notice
13.1.2010	Ke wrote to the IRD claiming that the Company was dormant and its bank accounts had been closed.  He requested the IRD to re-issue the cheque to Careship, claiming it to be a subsidiary of the Company with the same director
14.1.2010	The Petition came to the notice of the Assessor
19.1.2010	After checking the Company’s corporate records, the Assessor gave instruction to the Refund Section of the IRD to proceed with paying the Tax Refund to Careship
27.1.2010	A cheque for the Tax Refund was issued by the IRD to Careship which was cashed on the same day
10.2.2010	The Company was ordered to be wound up

6.  The evidence adduced by the Liquidators is that they had made enquiries with Careship, Ke and a former director of the Company, Alfred Lam, with the view to recover the Tax Refund.  Neither Careship nor Ke had responded to the Liquidators’ enquiries.  Alfred Lam claimed that Careship had ceased business and was a burden with negative value.  Such a claim is consistent with :

(1) The audit working papers of the Company for the year ended 31.12.2008, which stated that Careship was a “negative equity”;

(2) Site visits to the former registered office of Careship showed that the premises were occupied by another company;

(3) The Liquidators wrote to Careship’s latest registered address but their letters were returned and marked “Addressee unknown”.  They were informed that Careship’s company secretary had ceased to provide services to that company for several years, that it did not have the latest contact of Careship and it was owed outstanding fees by that company.

The applicable law

7.  Under S 79(1), the Company has a statutory right to the refund of tax paid in excess of the amount that it was properly chargeable^[2] :

“(1) If it is proved to the satisfaction of the Commissioner by claim duly made in writingwithin 6 years of the end of a year of assessment or within 6 months after the date on which the relevant notice of assessment was served, whichever is the later, that any person has paid tax in excess of the amount with which he was properly chargeable for the year, such person shall be entitled to have refunded the amount so paid in excess: …”

[emphasis added]

8.  Pursuant to S 79(2), the Liquidators have the same right as the Company to make a claim for tax refund if the Company had been prevented from making the claim by reason of its liquidation.

9.  S 182 provides :

“In a winding up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void.”

10.  The Liquidators submit that the payment of the Tax Refund to Careship necessarily entailed a void disposition of the Company’s property by way of the reduction or discharge of the right of the Company to be paid the Tax Refund.  The Liquidators rely on 2 Court of Appeal authorities, namely, Bank of East Asia v Rogerio Sou Fung Lam [1988] 1 HKLR 181 and Chevalier (HK) Ltd v Joint Liquidators of Right Time Construction [1990] 2 HKLR 223.  I agree that these authorities support the contention advanced by the Liquidators.  

11.  Given the acceptance by the CIR that the above authorities bind this court, it is unnecessary to discuss them for the present purpose save to note that it is common ground that the law in England differs from that in Hong Kong. Construing the equivalent statutory provisions (which are practically identical with S 182), it has been held in England since the case of Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch 555 that the avoidance of disposition does not apply to a transaction between the company subject to a winding up petition and a party (such as a bank) which disposed of its property whilst acting as its agent.  Hence, in England the liquidators of the company can only look to the recipient of its property, not its agent who disposed of the same, for recovery. 

12.  I should also note that the CIR has reserved his position to argue the proper construction of S 182 if these matters be taken to a higher court.

13.  However, as the law stands, the combined effect of S 79(1) and S 182 is that the CIR has failed to discharge his obligation to pay the Tax Refund to the Company because the payment to Careship is of no legal effect. 

14.  This takes me to the 2 arguments identified in para 4 above.

Whether the Liquidators should exhaust their remedies against Careship first

15.  First of all, there is no requirement to be found in the IRO to the effect that the Liquidators are required to exhaust their remedies against Careship before claiming against the CIR.

16.  The CIR’s submission is premised upon a dictum made in Re Gray’s Inn Construction [1980] 1 WLR 711, 721F-G per Buckley LJ :

“It seems to me, however, that primarily these sums, amounting in the aggregate to £4,824, should be recovered from the creditors to whom they were paid, and that the bank should in any event only be required to repay them to the extent that the amounts, if any, which prove to be irrecoverable from those creditors exceed the dividends which would be payable in respect of them.”

17.  However, I agree with Mr Yu, who appeared for the Liquidators, that the dictum must be understood in its proper context, ie, it was part of a discussion as to whether it was proper for the first instance judge to have exercised his discretion to validate an otherwise void disposition^[3].

18.  This point was considered by Mortimer J (as he then was) in the first instance decision in Bank of East Asia v Rogerio Sou Fung Lam, HCA 2889/1985, unrep, 9 April 1987 at para 24 :

“If it be thought that the Court of Appeal [in Gray’s Inn] was ruling that the liquidator must always seek recovery from creditors and pursue their remedies to a conclusion in order to show that the money is irrecoverable before they can recover from a bank in these circumstances I decline to follow such a rule. I do not believe the Court of Appeal was laying down any such rule. Nevertheless, the creditor is primarily liable, therefore, the liquidator will usually seek to recover from the creditor if it is reasonable to do so. This does not mean that the liquidator has no right of recovery from the bank when the transaction is void and has not been validated.”

19.  The Court of Appeal in Bank of East Asia endorsed Mortimer J’s decision, noting that the judge was disinclined to treat the dictum of Buckley LJ in Gray’s Inn as intending to lay down any hard and fast rule that a liquidator must always exhaust his remedies^[4]. Giving judgment for the Court, Clough JA observed that the dictum of Buckley LJ was made in the context of deciding how the court’s discretion is to be exercised in an application for validation of dispositions by a bank^[5] :

“The relevant dictum of Buckley, LJ must, in our judgment, be understood in the context of a liquidator’s proceedings to recover money paid out by a bank by way of dispositions rendered void by the equivalent of s 182 of the Companies Ordinance. Such a claim was being countered by an application by the bank for validation of such dispositions. In these circumstances the court has to decide what isjust and fair in the circumstances of each case and normally pre-liquidation creditors who have been paid by the company after the presentation of the petition will be compelled to refund and prove for their debts: …

Whilst Buckley LJ and the other members of the Court of Appeal expressed the views cited above regarding the proper action to be taken by the liquidator against the bank regarding payments made to creditors during the vulnerable period, the court had previously recognized in the judgment of Buckley LJ at p 721 D-F that the bank was “vulnerable to a refusal to validate” in respect of these payments. There was no suggestion that the bank was not legally liable in respect of the payments, the real question before the court was whether validation should be permitted to absolve the bank.”

20.  On the strength of these Hong Kong authorities, the alleged failure of the Liquidators to exhaust their remedies against Careship is irrelevant to the question whether the payment of the Tax Refund to Careship is void and whether an order for payment of the Tax Refund by the CIR to the Liquidators should be made.

21.  I should add that even if there were such a rule as contended by the CIR, I do not believe that in exhausting the remedies against Careship the Liquidators are required to incur costs to pursue pointless action(s) against the same.  This is inconsistent with common sense. 

22.  Notwithstanding the criticisms of Ms Cheung, who appeared for the CIR, in respect of various actions taken by the Liquidators in their efforts to pursue Careship for the recovery of the Tax Refund, I am satisfied on the evidence that the Liquidators have done what is reasonable to explore whether the Tax Refund may be recovered from Careship.  Further, it is reasonable for them to take the view that there is no alternative but to make this application. 

23.  With respect, I only find substance in 1 of the criticisms, namely, that the Liquidators have failed to make enquiries with Mr Ke Zhenxing who, according to the company record of Careship, had replaced Ke as the director on 1 January 2010.  The new director shared the same Mainland address as that of Ke.  However, as Mr Yu has pointed out, the Liquidators were probably acting under financial constrains in the winding up of the Company.  I do not see this oversight as changing the complexion of the picture. 

S 79

24.  The kernel of Ms Cheung’s 2^nd argument is that no S 79 application has been made by the Company, and it is now too late to make one because the limitation period for the same had expired on 31 March 2015.  To resolve this argument, I need to flesh out the facts concerning the dealings between the Company and the IRD.

25.  According to the evidence filed by the Assessor, due to the failure of the Company to furnish a tax return, an estimated profits tax assessment for the year 2008/09 and provisional tax for 2009/10 was issued on 28 August 2009.  On 12 October 2009, the Company’s tax representative (“Lee & Yu”) submitted a Notice of Objection to the estimated assessment together with an application for the holdover of provisional tax.  Due to irregularities (out of time and without a valid tax return), the applications were rejected on 21 October 2009.

26.  On 16 December 2009, the Company submitted another letter to the IRD requesting the refund of the provisional tax paid for 2008/09.  On the same day, Lee & Yu filed the Company’s audited financial statements for the year ended 31 December 2008.  On 24 December 2009, the tax return with adjusted losses in excess of HK$5.7 m was filed by Lee & Yu.  The covering letter stated as follows :

“With reference to your letter dated 21^st October 2009 and our client’s letter dated 16^th December 2009, we hereby object the Notice of Estimated Assessment dated 28^th August 2009 issued to our above client in respect of the year of assessment 2008/09 and 2009/10 (provisional) on the ground that the company suffered from loss for the said year of assessment. We enclose herewith the duly signed Profits Tax Return for the year of assessment 2008/09 for your reference and the audited financial statements have been filed to your department on 16^th December 2009.”

27.  On 31 December 2009 a re-assessment was conducted by the IRD pursuant to the objection.  On 6 January 2010, a standard form letter was issued to the Company informing it that the estimated assessment had been revised and that a refund of tax would be issued.  On 12 January 2010, a Notice of Revised Assessment and Refund of Tax for 2008/09 and Notice of Provisional Tax for 2009/10 (“Notice”) was issued to the Company.  In short, due to the losses of 2008/09, no tax was payable for that assessment year, nor any provisional tax payable for the following year. Instead, there was a refund of the provisional tax paid for 2008/90 in the sum of HK$549,600. 

28.  I have been shown the original of the Notice at the hearing by Ms Cheung.  According to the 2^nd page of that document, which does not appear in the hearing bundles, the Notice was issued pursuant to ss 64(3) and 70A of the IRO. 

29.  Section 64 of the IRO governs the objections made by aggrieved taxpayers.  Section 64(3) provides as follows :

“In the event of the Commissioner agreeing with any person assessed, who has validly objected to an assessment made upon him, as to the amount at which such person is liable to be assessed, any necessary adjustment of the assessment shall be made.”

30.  Section 70A of the IRO provides for the powers of assessor to correct errors.

31.  Neither s 64(3) nor s 70A of the IRO provides for the refund of excess tax.  It appears that such power is only governed by S 79.  The argument here is boiled down to whether a claim had been duly made in writing by the Company. 

32.  With respect, this is not an easy argument for the CIR.  To begin with, there is no prescription as to what constitutes a “claim duly made in writing”.  I believe that it is a question of fact to be approached with common sense.  In Weson Investment Ltd v CIR [2007]2 HKLRD 567, §14, it was held by the Court of Appeal that a claim in writing under S 79 could be constituted by correspondence from tax advisors or solicitors. 

33.  In this case, I have no doubt that both the letters from the Company dated 16 December 2009 and the one from Lee & Yu dated 24 December 2009 could constitute a claim under S 79. 

34.  I do not believe that it is important for the letters to identify the statutory provision(s) that was relied upon.  It is a matter of law whether they came within S 79.  For the same reason, it matters not if the wrong statutory provision was referred to in the letters.  Equally, the fact that the IRD dealt with the matter pursuant to ss 64 and 70A did not preclude the application of S 79.  Indeed, I see no reason why all 3 sections were not engaged in this case.  They are consonant with each other.

35.  I believe that Mr Yu is right in his submission that the CIR is acting inconsistently by contending that there is no S 79 claim.  The Company’s letter of the 16 December 2009 was treated by the IRD as a request for refund.

36.  Further, if the Tax Refund was made pursuant to the power under S 79 (see para 31 above), it must have been accepted by the IRD that a claim had been made thereunder.

37.  For these reasons, the 2^nd argument of the CIR is also rejected. 

38.  For completeness, I should say that in light of the application of S 182 which rendered the payment to Careship void, the liability of the CIR to pay the Tax Refund to the Company has not been discharged (see Bank of East Asia, CA, supra at 191E-F). 

39.  In the premises, the relief sought in the Summons are justified and I so order, save that a costs order nisi is made in favour of the Liquidators. 

40.  Last but not least, I am grateful to both counsel for their able assistance.