MOULIN GLOBAL EYECARE TRADING LTD (IN LIQUIDATION) (formerly known as MOULIN OPTICAL MANUFACTORY LTD) v. THE COMMISSIONER OF INLAND REVENUE AND ANOTHER

CACV 64/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 64 OF 2011

(ON APPEAL FROM HCAL NO 29 OF 2010)

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BETWEEN

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JUDGMENT

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Hon Kwan JA:

1.  This is an appeal of the Commissioner of Inland Revenue (“the Commissioner”) from the judgment of Reyes J on 15 February 2011 in an application for judicial review brought by the liquidators of Moulin Global Eyecare Trading Limited (“MGET”). The Commissioner was the 1^st respondent to the proceedings. The liquidators did not pursue their claim for relief against the 2^nd respondent, the Inland Revenue Board of Review, and the Board took no part in this appeal.

2.  By his judgment, Reyes J quashed the decisions of the Commissioner in which she refused to exercise the power under section 64 of the Inland Revenue Ordinance, Cap 112 (“the Ordinance”) to extend time for the liquidators to object to MGET’s profits tax assessments from 1998/99 to 2003/04 and refused to exercise the power under section 70A of the Ordinance to revise MGET’s tax assessment in respect of the year 2003/04. He ordered that the liquidators’ application for extension of time under section 64 and for revision of the assessment of 2003/04 be remitted to the Commissioner for reconsideration in the light of his judgment. He made a further declaration that the liquidators are not barred from challenging the profits tax assessments underlying the Commissioner’s proof of debt lodged in the winding up of MGET by way of the procedures in the Ordinance or by way of judicial review.

3.  The Commissioner did not pursue her appeal regarding the declaration, which followed on the judge’s conclusion that res judicata does not apply to bar the liquidators from challenging the assessments underlying the Commissioner’s proof of debt by recourse to the procedures in sections 64 and 70A. The key issue in this appeal is whether the taxpayer, by its liquidators, may re-open its tax assessments years later on the ground that its controlling directors at the time the tax returns were filed had fraudulently inflated its profits for the purpose of defrauding its bankers and other creditors. This raises the question whether MGET is bound by the knowledge of its fraudulent directors.

The background

4.  The relevant background matters, taken largely from the judgment below, may first be stated as follows.

5.  MGET was the largest operating subsidiary of a multinational enterprise known as the Moulin group. Its ultimate parent company, Moulin Global Eyecare Holdings Limited (“Holdings”), was a listed company in Hong Kong. At all material times, the Ma family, including the group chairman and founder Ma Bo Kee and his son Cary Ma, controlled a substantial block of shares in Holdings. Provisional liquidators were appointed for MGET on 23 June 2005 and Holdings and MGET were ordered to be wound up on 5 June 2006. Given the size of the group’s operations and the complexity of the issues involved, the winding up of the Moulin group has been characterised as one of the most complex liquidations in Hong Kong.

6.  The liquidators discovered serious anomalies in MGET’s accounts. In particular, they found that Ma Bo Kee, his sister-in-law the group treasurer Michelle Lam and the group chief executive officer Cary Ma (collectively “the Ma Directors”) had falsified MGET’s accounts in a massive way through the creation of fictitious sales. They had inflated MGET’s profits with false sales records, giving its creditors and the investing public a false view of the financial health of the group. In February 2009, criminal charges were laid against Ma Bo Kee, Michelle Lam, Cary Ma and others arising out of the falsification of MGET’s profits and the obtaining of trade finance on false premises to provide funding for MGET’s business. Michelle Lam and Cary Ma pleaded guilty in late 2010 and Ma Bo Kee was found guilty after trial. In sentencing them to imprisonment ranging from 9.5 to 12 years, Line J mentioned that creditor banks were owed $2.7 billion and investors $1.75 billion and described their conduct as “commercial crime of the worst kind”.

7.  In consequence of the falsification of MGET’s profits, the Ma Directors had caused profits tax returns to be submitted to the Commissioner based on the accounts of MGET approved by its board of directors. MGET was assessed by the Commissioner for profits tax totalling $88,972,757 in the years of 1998/99 to 2003/04. It was found by the liquidators that after reversing the false sales in the accounts, MGET had made substantial losses in each of the relevant years and had made no profit in the tax years from 1998/99 onwards. To the liquidators, this meant that in the years of 1998/99 to 2003/04, MGET had been wrongly assessed for and had wrongly paid profits tax of nearly $89 million.

8.  Subsequent to the appointment of provisional liquidators and in August and November 2005, the Commissioner issued additional and estimated assessments to MGET in respect of the years 1999/2000, 2001/02, 2002/03, 2004/05 and 2005/06 for profits tax of $10,363,532. The estimated assessments were raised pursuant to the Commissioner’s power under section 59(3) of the Ordinance to make assessments in the absence of returns from a person thought to be chargeable to tax, as no tax returns were filed for MGET in respect of 2004/05 and 2005/06. The tax assessed in the additional and estimated assessments has not been paid and is the subject of the proof of debt filed by the Commissioner in MGET’s liquidation on 15 August 2006.

The Commissioner’s decisions

9.  The liquidators entered into protracted correspondence with the Commissioner with the objective of securing a refund of the profits tax which they contend MGET had wrongly paid. Some of these letters contained the decisions of the Commissioner which formed the subject of the judicial review. As Reyes J had held that the two earlier “decisions” do not amount to reviewable decisions and there is no appeal from this finding, it is not necessary to mention the earlier correspondence.

10.  The first relevant letter was the liquidators’ letter to the Commissioner dated 13 November 2009 in which the liquidators “formally object pursuant to s 64(1)(a) of the Ordinance to the assessments for the Years of Assessment [from 1998/99 to 2002/03, as defined in the letter] upon the ground that [MGET] made no assessable profits in each of those years.” The liquidators subsequently stated there was a clerical error here in that the “Years of Assessment” should be taken to refer to 1998/99 to 2003/04. Nothing turns on this.

11.  In this letter, the liquidators stated that by reason of the conduct of the former directors, their frauds on the company were concealed, and that had prevented MGET from giving notice of objection within one month after the date of the notices of assessment for “the Years of Assessment”, as required under section 64(1). (I pause here to note that the last of the notices of assessment was given on 29 August 2005, so the notice of objection on 13 November 2009 was well outside the one-month limit in section 64.) Accordingly, they requested the Commissioner to consider their notice of objection to the notices of assessment for “the Years of Assessment” and to determine it pursuant to section 64(2) as a valid notice of objection. They also “formally” claimed repayment of the total sum of $91,770,791 in respect of the tax paid for “the Years of Assessment”, based on section 70A and restitution at common law. The evidence they relied on was the 10^th affidavit of one of the liquidators in which he described the major aspects that MGET’s accounts had been falsified and the model prepared by the liquidators which reversed the effect of the false sales to five major North American customers, showing that MGET had made substantial losses between 1998/99 and 2004/05.

12.  The Commissioner replied by the letter of the Department of Justice dated 4 December 2009. This was referred to in the proceedings below as “the 3^rd Decision”. The relevant parts of the letter read as follows:

“Our client [i.e. the Commissioner] has duly considered the circumstances described in your letter and is not satisfied that owing to absence from Hong Kong, sickness or other reasonable cause, the Company has been prevented from lodging an objection within one month after the dates of the notices of assessment for the Years of Assessment under s 64 of the Inland Revenue Ordinance (“the Ordinance”). Our client is therefore unable to accept your letter as a valid notice of objection under s 64 to the said assessments.

Our client also considers that s 70A of the Ordinance is not applicable to the 2003/04 assessment as there is no error or omission in the 2003/04 tax return submitted.

Please note that s 70 of the Inland Revenue Ordinance provides, inter alia, that where no valid objection has been lodged within the statutory one-month objection period against an assessment as regards the amount of the assessable profits assessed, the assessment as made shall be final and conclusive for all purposes of the Ordinance as regards the amount of such assessable [profits] assessed. As no valid objection under s 64 has been made to the 1998/99 to 2003/04 assessments within the statutory one-month objection period, these assessments are considered final and conclusive.”

13.  The liquidators wrote to the Commissioner on 18 January 2010 inviting the Commissioner to reconsider granting an extension of time for lodging an objection pursuant to section 64(1)(a) and to determine the objection pursuant to section 64(2). They stated that MGET’s financial accounts and records were tainted by concealed fraud perpetrated by previous directors. At the time of the appointment of provisional liquidators in 2005, the time for lodging an objection in respect of the assessments had already long expired. It would not have been possible for MGET to lodge an objection within time prior to the appointment of provisional liquidators when the concealed fraud was not yet discovered.

14.  The Department of Justice replied on behalf of the Commissioner by letter dated 4 February 2010. This was referred to in the proceedings below as the “4^th Decision” and the relevant parts were as follows:

“We are instructed that so far the fraud alleged has not yet been proved and that, even if it is proved, it was, as you alleged, perpetrated by the former directors of MGET and as such the tax returns allegedly tainted by fraud would be regarded as being filed with knowledge of MGET of the alleged fraud and MGET cannot now argue that it was prevented from lodging an objection within time under s 64(1)(a) of Cap 112.

In the above circumstances, our client is not satisfied that there is a reasonable cause which prevents MGET from lodging an objection within time and therefore cannot accept your request for an extension of time for lodging an objection.”

15.  The Commissioner’s first ground for refusing an extension of time (that the fraud of the Ma Directors had not yet been proved) has been overtaken by events, as noted by Reyes J. The Ma Directors have been found guilty and sentenced in relation to falsification of the group’s accounts and their involvement in fraud has been established beyond reasonable doubt. No submissions have been advanced on behalf of the Commissioner in this appeal in support of the first ground for refusing an extension of time. The Commissioner only relied on the ground that MGET had no “reasonable cause” to fail to object to the assessment within the one-month period under section 64, as the knowledge of the fraudulent Ma Directors should be attributed to the company.

16.  The liquidators took out proceedings for judicial review on 10 March 2010 to quash, inter alia, the 3^rd and 4^th Decisions and for an order of mandamus. The notice of application for leave to apply for judicial review was amended with leave granted by Reyes J on 26 January 2011.

The judgment of Reyes J

17.  The judge declined to hold that the Commissioner was Wednesbury unreasonable in refusing to accept that MGET’s accounts were tainted by fraud and to immediately direct a nil assessment and refund the tax paid. Even if an extension of time under section 64 or a revision under section 70A was appropriate, the court was not in a position to say that a rational Commissioner properly advised would arrive at only one conclusion on the quantum to which the assessments should be revised. So even if the court were to find for MGET, all that the judge could do was to remit the case to the Commissioner with a direction that she should reconsider whether to extend time for objections or to allow revision of MGET’s returns. MGET does not challenge this aspect of the judgment on appeal.

18.  On the extension of time under section 64, the judge held that the Commissioner was wrong in law in attributing the knowledge of the Ma Directors to MGET in deciding that MGET did not have “reasonable cause” which prevented it from objecting to the assessments within time. He considered the juridical basis for the rules by which knowledge and acts are attributed to a company, as analysed by Lord Hoffmann in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 506 to 511. It would be convenient at this point to explain what these rules of attribution are, as they feature prominently in this appeal. 

19.  Firstly, there are the primary rules of attribution. They are generally found in the constitution of a company, and will state, for example, that the decision of the board of directors or the majority vote of shareholders is to be treated as the decision of the company for a specified purpose. Where there is no express provision in the articles of association, the primary rules may be implied by company law, such as that a unanimous decision of the shareholders shall be treated as the decision of the company.

20.  Next are the general or agency rules of attribution, which apply equally to natural persons. A company will be vicariously liable for the acts of its duly appointed agents and knowledge of its agents may be imputed to the company under the general principles of agency.

21.  Lastly, there are the special rules of attribution, which are default rules that may apply where the primary or general rules of attribution do not meet the requirements presented by the application of the substantive law to a company. This is how Lord Hoffmann explained the special rules at 507B to F:

“The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficientto enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself," as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company?

One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.”

22.  Lord Hoffmann returned to the theme of this being a question of construction in each case at 511G to 512B:

“But their Lordships would wish to guard themselves against being understood to mean that whenever a servant of a company has authority to do an act on its behalf, knowledge of that act will for all purposes be attributed to the company. It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. … Likewise in a case in which a company was required to make a return for revenue purposes and the statute made it an offence to make a false return with intent to deceive, the Divisional Court held that the mens rea of the servant authorised to discharge the duty to make the return should be attributed to the company: see Moore v I. Bresler Ltd [1944] 2 All E R 515. On the other hand, the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule.”

23.  Having referred to the different rules of attribution, Reyes J considered their application in the present case. The Commissioner’s counsel, Mr Beresford, submitted that under the primary rules of attribution, the presentation of MGET’s financial accounts and tax returns by the Ma Directors must be regarded as the acts of MGET and the knowledge of the Ma Directors must be attributed to the company. The judge declined to accept this, saying:

“Mr Beresford might be correct in his analysis in the ordinary course of events. But, where fraud or a knowing breach of duty is concerned, there is a well-recognised exception to the conventional rules of attribution.”

24.  The exception referred to by the judge was a principle of agency law in In re Hampshire Land Company [1896] 2 Ch 743. Put simply, knowledge of an agent is not attributed to the principal where it is acquired by the agent who is defrauding the principal in the same transaction (Bowstead on Agency (19^th ed) para 8-207). Applying that principle, the judge held that since the Ma Directors were defrauding MGET, their knowledge (to the effect that the company’s accounts and the returns based on them were false) cannot be attributed to MGET.

25.  The Commissioner had submitted that the Hampshire Land principle should not apply as MGET was not the target of the fraud of the Ma Directors and that the target was the banks which were duped by the false accounts into maintaining MGET’s credit lines. It was contended that MGET was but a “secondary victim” and reliance was placed on dicta in the decisions of the English Court of Appeal and the House of Lords in Stone & Rolls Ltd (in liquidation) v Moore Stephens [2009] 1 AC 1391. The judge rejected these submissions. He did not think anything in Stone & Rolls militates against the application of the Hampshire Land principle to the present case. The majority of the Law Lords decided against the liquidators that the company was to be imputed with knowledge of the fraud on the limited basis that the company was a one-man company. This is not the case with MGET, which was held, through intermediaries, by a listed company. The judge did not think MGET was a “secondary victim” as the payment of tax was an important component of the fraud. For these reasons, he held that the Commissioner had no basis in law to attribute the mindset of the Ma Directors to MGET.

26.  The judge did not go on to consider if the knowledge of the Ma Directors should be attributed to the company under the special rules of attribution, although this was the Commissioner’s fall-back submission.

27.  Having held that the Commissioner was in error in refusing to extend time to object, the judge observed that it was strictly unnecessary to deal with the complaint that the Commissioner was wrong to refuse to revise the assessments under section 70A. In any event, the liquidators were out of time for the years of 1998/99 to 2002/03 under the six-year limit stipulated in section 70A, so the only relevant assessment was for 2003/04. The Commissioner contended that there was “no error” in the tax return to require revision under section 70A, relying on Extramoney Ltd v Commissioner of Inland Revenue [1997] HKLRD 387.  The judge distinguished this case and held that as the guilty knowledge of the Ma Directors should not be attributed to MGET, MGET cannot be deemed to have deliberately chosen to overstate its returns. He concluded that the Commissioner had wrongly refused to consider whether MGET’s return for 2003/04 should be revised by reason of error.

The issues on appeal

28.  As mentioned at the outset, the key issue in this appeal is whether the Commissioner was wrong in law in attributing the knowledge of the fraudulent Ma Directors to MGET. The view formed by the Commissioner on this legal question was crucial to her decisions that there was no “reasonable cause” to extend time for objection under section 64 and that there was no “error” in the tax return to be corrected under section 70A.

29.  Mr Bleach, SC, and Mr Beresford with him, argued for the Commissioner that knowledge should be attributed to MGET under the primary rules of attribution, alternatively under the special rules of attribution as a matter of construction, and that the judge was wrong to hold that the Hampshire Land principle could be applied where knowledge is attributed to the company under the primary rules of attribution or the special rules (which the judge did not appear to have considered at all). As a subsidiary argument, they contended that if it is necessary to consider imputing knowledge by the agency rules, the Hampshire Land principle should not be applied as MGET was not a primary victim or target of the fraud.

30.  Before dealing with the above submissions, it would be appropriate to set out the context for the question of construction if knowledge should be attributed to the company, having regard to the contents and policy of the Ordinance.  

The approach to statutory interpretation

31.  The principles for statutory interpretation are well established. The modern approach is to adopt a purposive approach interpretation and the context of a statutory provision should be taken in its widest sense (HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 at paras 11 to 14). The statute shall receive such fair, large and liberal construction as will best ensure the attainment of its object (Interpretation and General Clauses Ordinance, Cap 1, section 19). The relevant provisions of the legislation should be read together and in the context of the whole statute as a purposive unity in its appropriate legal and social setting; it is necessary to identify the interpretative considerations involved and, if they conflict, to weigh and balance them (Medical Council of Hong Kong v Chow Siu Shek (2000) 3 HKCFAR 144 at 154B to C).

32.  The use of extrinsic materials is for a limited purpose, it is to enable the court to understand the factual context in which the statute was enacted and the mischief at which the statute was aimed, and not for the purpose of construing the words of the statute (Director of Lands v Yin Shuen Enterprises Ltd & Anr (2003) 6 HKCFAR 1 at paras 21 and 22). The purpose of a statutory provision may be evident from the provision itself, the recommendation of a report, the explanatory memorandum to the bill, or a statement in the Legislative Council by the responsible government official relating to the bill (Cheung Kwun Yin, supra at para 14).

The scheme under the Ordinance

33.  The statutory scheme was comprehensively set out in the Commissioner’s written submission. Mr Burns, SC for the liquidators did not take issue with the description. The scheme may be described as follows.

34.  The long title of the Ordinance is “to impose a tax on property, earnings and profits”. The Ordinance applies to companies, as, in section 2, “person” is defined to include “a corporation, partnership, trustee, whether incorporated or unincorporated, or body of persons”.

35.  Part IV deals with profits tax and Part IX deals with returns. Section 51(5) in Part IX provides as follows:

“A return, statement, or form purporting to be furnished under this Ordinance by or on behalf of any person shall for all purposes be deemed to have been furnished by that person or by his authority, as the case may be, unless the contrary is proved, and any person signing any such return, statement, or form shall be deemed to be cognizant of all matters therein.”

36.  The rebuttable presumption in the latter half of section 51(5) only goes to the awareness of the contents of the document. The deeming provision does not extend to knowledge that a document is false (R v Ng Wing Keung [1997] HKLRD 142 at 146F).

37.  Part XIV is concerned with penalties and offences. Section 80 makes provision for penalties for failure to make returns, making incorrect returns, etc., without reasonable excuse. Section 82 contains penal provisions relating to fraud, etc.

38.  The obvious purpose of the provisions requiring prompt and accurate returns is to protect the public revenue. Hence, wrongdoing in making a false return without reasonable excuse is to be deterred.

39.  Part X is about assessments. Section 59(1) provides that an assessor is to make an assessment of the taxpayer’s liability to pay tax as soon as may be after the expiration of the time limited by the notice requiring the taxpayer to furnish a return under section 51(1). If the taxpayer’s return is accepted, the assessment is based on the return, but if the return is not accepted or if the return has not been furnished, or if the accounts of the trade or business have not been kept in a satisfactory form, the assessor is required to make an estimate (sections 59(2) to (4)).

40.  Under section 62, the Commissioner is required to give a notice of assessment to each person who has been assessed, stating the amount assessed, the amount of tax charged and the due date for payment. Any tax not paid in the manner directed in the notice of assessment on or before the due date shall be deemed to be in default (section 71(1)), it is recoverable as a civil debt (section 75(1)), and the existence of a pending notice of objection or appeal is not a sufficient reason to delay the payment of tax (section 71(2)).

41.  Part XI provides for objections and appeals. There are two ways in which the correctness of an assessment to tax may be challenged: the objection procedure under section 64, and the power of the assessor to correct errors under section 70A.

42.  I set out the material provisions in section 64:

“(1) Any person aggrieved by an assessment made under this Ordinance may, by notice in writing to the Commissioner, object to the assessment; but no such notice shall be valid unless it states precisely the grounds of objection to the assessment and is received by the Commissioner within 1 month after the date of the notice of assessment:

Provided that-

(a) if the Commissioner is satisfied that owing to absence from Hong Kong, sickness or other reasonable cause, the person objecting to the assessment was prevented from giving such notice within such period, the Commissioner shall extend the period as may be reasonable in the circumstances;

(b) where any assessment objected to has been made under section 59(3) in the absence of any return required under section 51, no notice of objection against such assessment shall be valid unless, in addition to such notice being valid in accordance with the foregoing provisions of this subsection, the return required as aforesaid has been 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;

(c) where the assessment is a reassessment of the tax due from a person having the effect of either increasing or reducing that person's liability to tax, the person so reassessed shall have no further right of objection than he would have had if the reassessment had not been made except to the extent to which, by reason of the reassessment, a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased or reduced. …

(2) On receipt of a valid notice of objection under subsection (1) the Commissioner shall consider the same and within a reasonable time may confirm, reduce, increase or annul the assessment objected to …

(3) 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.

(4) In the event of the Commissioner failing to agree 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, the Commissioner shall, within 1 month after his determination of the objection, transmit in writing to the person objecting to the assessment 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. …”

43.  Thus, for an adjustment of the assessment to be made under section 64, four conditions must be satisfied: (1) the person aggrieved must give notice of objection; (2) the notice must state precisely the grounds of objection; (3) it must be received by the Commissioner within 1 month after the date of the notice of assessment; and (4) subject to the rights of appeal, the Commissioner must agree the amount at which the taxpayer is liable to be assessed.

44.  Under proviso (a) to section 64, the Commissioner may extend time to object to an assessment if, owing to (1) absence from Hong Kong, (2) sickness, or (3) other reasonable cause, the person objecting to the assessment was prevented from giving notice within 1 month after the date of the notice of assessment. The time extended is such “as may be reasonable in the circumstances”.

45.  The word “prevented” in this proviso and in a similar provision in section 66(1A) had been considered by the courts. In In re an application by Chun Yuet-bun for judicial review [1988] 1 HKLR 336, it was said at 339G that the Commissioner’s duty in this proviso is to consider the reasons put forward by the taxpayer for the late objection and then to ask himself this question: “Is it owing to (a) absence from Hong Kong, or (b) sickness, or (c) some other reasonable cause that the taxpayer was prevented from giving the prescribed notice?”. In Chow Kwong Fai v Commissioner of Inland Revenue [2005] 4 HKLRD 687, Woo V-P (with whom the other members of the Court of Appeal agreed) said in para 20 that the word “prevented” should best be understood to bear the meaning of “unable to” (未能) as in the Chinese language version of the provision; it imposes a higher threshold than a mere excuse and would appear to give proper effect to the rigour of time limit imposed by a taxation statute.

46.  If the Commissioner does not agree with the amount at which the taxpayer is liable to be assessed in a valid objection, the Commissioner is required to transmit his determination in writing with a statement of the facts to the taxpayer (section 64(4)). The taxpayer may then appeal to the Board of Review as stipulated in section 66. An appeal on a question of law from the decision of the Board lies to the Court of First Instance (section 69). There is also a right to appeal directly to the Court of Appeal in certain circumstances (section 69A).  

47.  Where no valid objection or appeal has been lodged within the time limited by Part XI, the assessment “shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable  … profits …” (section 70).

48.  Notwithstanding section 70, section 70A allows an assessor to correct an assessment in case of error or omission. The material terms in section 70A read as follows:

“(1) Notwithstanding the provisions of section 70, if, upon application made within 6 years after the end of a year of assessment or within 6 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, … the assessor shall correct such assessment: …

(2) Where an assessor refuses to correct an assessment in accordance with an application under this section he shall give notice thereof in writing to the person who made such application and such person shall thereupon have the same rights of objection and appeal under this Part as if such notice of refusal were a notice of assessment.”

49.  The meaning of “error” in this context was considered in Extramoney Ltd, supra at 396A to B. It was held 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 hoped for is not an error within the terms of section 70A.

50.  A time limit is imposed for an application for relief under section 70A. It must be 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. There is no dispute that the liquidators were out of time to apply under section 70A for the years of 1998/99 to 2002/03.

51.  Where an assessor refuses to correct an assessment, he is required to give notice in writing and the taxpayer has the same rights of objection and appeal under Part XI as if the notice of refusal were a notice of assessment (section 70A(2)).

52.  In Part XIII, which deals with repayment, section 79(1) provides for tax paid in excess to be refunded if a claim is made within six years of the end of a year of assessment or within six months after the date on which the relevant notice of assessment was served, whichever is the later, but nothing in this section shall operate to extend or reduce any time limit for objection or appeal specified in any other section, or to authorise the revision of any assessment which has become final and conclusive.

53.  The statutory scheme described above is designed to meet the need for finality in fiscal transactions. The legislature has also recognized the need to avoid hardship to taxpayers. Hence, a balance was struck between the two. The legislature has therefore enacted time limits for objections, correction of errors or omissions, and repayments: one month subject to extension in specified circumstances for objections under section 64, six years in relation to the specified errors and omissions under section 70A, and six years in relation to tax paid in excess under section 79.

54.  As Mr Bleach has submitted, if late applications for objections and revision of assessments are to be permitted, this would undermine the statutory regime, expose the government to claims and increase the risk of disruption to public finances and the burden of taxation on other groups. The courts have recognized the need for taxation revenue to flow in predictable amounts according to projections as to cash flow, such that disputes as to the claims made by the tax authority upon taxpayers have been treated differently from other classes of disputes within the community (Chow Kwong Fai v Commissioner of Inland Revenue, supra at para 20).

55.  There is one other matter which may be relevant as an interpretative criterion. This is the presumption that the maxim qui facit per alium facit per se (who acts through another acts himself or herself) is implied in an enactment unless the contrary intention appears (Bennion on Statutory Interpretation (5^th ed) pages 1146 to 1149).

56.  I now turn to consider the key question if knowledge should be attributed under one of the rules of attribution.

The primary rules of attribution

57.  MGET adopted Table A in the First Schedule to the Companies Ordinance, Cap 32 as its articles of association. Regulation 82 in Table A provides that subject to the provisions of Cap 32, the memorandum and articles and to any directions given by special resolution, the business and affairs of the company shall be managed by the directors, who may exercise all powers of the company. Regulation 127 provides that the directors shall from time to time, in accordance with sections 122, 124 and 129D of Cap 32, cause to be prepared and to be laid before the company in general meeting such profit and loss accounts, balance sheets, group accounts (if any) and reports as are referred to in those sections. Hence, the responsibility for attending to the preparation of the accounts and laying them before the company in general meeting would have rested with the directors of MGET.

58.  The audited accounts of MGET for the year ended 31 March 1999 and the profits tax return for that year of assessment were shown to us. It is common ground that the profits tax computation was based on the accounts of the company. According to the report of the directors attached to the audited accounts, there were three directors (they are Ma Bo Kee and two others of the Ma family, Ma Bo Fung and Ma Bo Lung; Michelle Lam and Cary Ma were not directors of MGET) during the year. The balance sheet as at 31 March 1999 bore the notation that it was approved by the board of directors on 29 September 1999 and it was signed by all three directors. Cary Ma was appointed as an additional director of MGET as from October 2000. The accounts for subsequent years were likewise approved by the board of directors of MGET and signed by all the directors.

59.  Mr Bleach submitted that by reason of the above matters, applying the primary rules of attribution, the knowledge of the Ma Directors in causing the falsified accounts to be prepared should be attributed to MGET. As the board of directors were responsible for the management and control in the preparation of the accounts, and had de facto management and control of the relevant transactions, for the purpose of those transactions in which the accounts were manipulated and falsified, the directing mind and will of MGET in relation to those transactions were the mind and will of the Ma Directors (Ma Bo Kee acting in concert with Michelle Lam and Cary Ma, and later Ma Bo Kee and Cary Ma acting in concert with Michelle Lam). They were acting as the company in those transactions (not merely as the company’s agents) and their mind which directed their acts was the mind of the company. That means MGET had the requisite knowledge at all material times (see Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 170E to G, 171H, 199H to 200A). This is conceptually different from the situation when the knowledge of an individual is imputed to the company under the general or agency rules of attribution on the basis that he has acted as the company’s agent in the transaction.

60.  Mr Bleach submitted further that the Hampshire Land principle has no application where a natural person having management and control of a particular transaction is identified as the directing mind and will of a company for the purpose of that transaction under the primary rules of attribution, as knowledge is attributed here not on the ground of agency. The Hampshire Land principle, otherwise described as the adverse interest rule, is an exception to a general principle of agency (Stone & Rolls, supra, at para 198, per Lord Brown).

61.  Mr Burns contended that Mr Bleach is incorrect in arguing that the conduct and knowledge of the directing mind and will of MGET is to be attributed to the company for all times and for all purposes, such that the Hampshire Land principle cannot apply. It does not appear to me that was the argument advanced by Mr Bleach. In analysing whether the primary rules of attribution should apply in the present context, I do not think he has departed from the relevant inquiry of asking whose act or knowledge was, for this particular purpose or matter, namely the transactions in which the accounts were falsified, intended to count as the act or knowledge of the company.

62.  Mr Burns pointed out that the House of Lords in Stone & Rolls did not say that the Hampshire Land principle should not apply where knowledge is attributed by the primary rules. I do not think this is to the point, as there is clear support for this proposition in the cases cited by Mr Bleach as mentioned below and the House of Lords did not disapprove of these cases.

63.  Support for this proposition can be found in El Ajou v Dollar Land Holdings plc & Anr [1994] BCC 143 at 150E, 153B to C, 154E to G, in which the English Court of Appeal differentiated the two bases for attributing knowledge to a company and considered the Hampshire Land principle only in relation to the agency basis. That principle did not affect the attribution of requisite knowledge on the basis that the individual was the directing mind and will of a company in relation to the activities in question. The point was also made in MAN Nutzfahrzeuge AG & Ors v Freightliner Ltd [2005] EWHC 2347 (Comm) at para 154 that it is necessary to distinguish between several quite distinct sets of rules in attributing knowledge. Safeway Stores Ltd v Twigger [2011] Bus LR 1629 (decided after Stone & Rolls) is to the same effect that the Hampshire Land principle may not be invoked where the liability of the company is personal, primary and direct, not vicarious or secondary (paras 28 to 29, 37 and 52).

64.  I accept the above submissions of Mr Bleach. I am of the view that by the primary rules of attribution, knowledge of the Ma Directors in the manipulation of the accounts is attributed to MGET. As in Moore v I Bresler Ltd [1944] 2 All E R 515, the individuals who made false statements in the tax returns they filed for the company did so as the proper officers to make the returns and their dishonest acts were treated as the acts of the company whose liability in criminal law followed. And insofar as the judge had held that the primary rules of attribution would have no application where there is fraud or knowing breach of duty on account of the Hampshire Land principle (para 101 of the judgment), he has fallen into error.

65.  Mr Burns contended that the primary rules of attribution do not apply where a company is asserting its rights as opposed to defending its liabilities. He sought to distinguish Moore v I Bresler Ltd on the basis that it was concerned with the criminal liability of a company. He accepted that if the Commissioner were suing for unpaid tax, the primary or the special rules of attribution may apply. Here, the liquidators are seeking redress for the loss suffered as a result of the fraudulent conduct of the Ma Directors. They are asserting a right in seeking to recover tax which was wrongly paid, and that they are asserting the right to raise an objection under section 64 and the right to correct an assessment under section 70A, not defending a liability.

66.  I am unable to discern a sensible rationale for the distinction of rights and liabilities drawn by Mr Burns. In the present case, tax was paid in the sum of $88.9 million and $10.3 million was not paid and formed the subject of the Commissioner’s proof of debt. If Mr Burns’ distinction were to apply, the former would be regarded as a claim and the latter as a liability, and, on his reasoning, this would lead to the odd result that the primary rules of attribution would apply in the former situation but not in the latter. I also do not agree with him that the passages in the judgment of Lord Mance in Stone & Rolls at paras 220 and 230 would provide support for his submission above. As pointed out by Mr Bleach, there are other dicta in Stone & Rolls (para 145, per Lord Walker and para 227, per Lord Mance) that do not appear to support the proposition of Mr Burns in drawing a distinction between rights and liabilities, albeit such dicta were in the context of discussing the application of the Hampshire Land principle in an agency situation.

67.  The outer limit of the primary rules of attribution is reached and exceeded when the directing mind ceases completely to act, in fact or in substance, in the interests of the company and all of the activities of the directing mind are directed against the interests of the company with a view to damaging it. When that line is crossed, he ceases to be the directing mind and the doctrine that he is to be identified with the company ceases to operate (Canadian Dredge & Dock Co Ltd v The Queen (1985) 19 DLR (4^th) 314 at 351). It has not been suggested that the present case is that kind of extreme situation.

The general or agency rules of attribution

68.  I propose to deal with the submissions on the general rules of attribution before I turn to the special rules, as the special rules are in the nature of default rules where the primary or general rules of attribution do not apply and special rules had to be devised for the purpose if the true construction of the relevant statutory provisions so required. As mentioned above, this is a subsidiary argument advanced by the Commissioner. Having regard to my views on the primary and special rules of attribution, and as it is not strictly necessary to make any determination on the general rules, I will deal with counsel’s submissions briefly.

69.  Mr Bleach argued that even if the general rules of attribution should apply in that the Ma Directors were to be treated as the agents of MGET, their knowledge should be imputed to the company and the Hampshire Land principle should not apply. He relied on the judgment of Rimer LJ in Stone & Rolls, supra at paras 48, 72 and 73, in which the court posed the critical question if the company was the villain or victim of the fraud. In the case of the former, where the company was not the target of its agent’s dishonesty and its exposure to the fraud was merely secondary, the Hampshire Land principle would not be engaged. He submitted that the tax paid by MGET was incurred as necessary expenses in the course of perpetrating the fraud on the lending banks. Hence, MGET was not a primary victim of the fraud.

70.  The difficulty with this argument is that the House of Lords in Stone & Rolls did not endorse the distinction between primary and secondary victims. Even if such a distinction should be drawn, Reyes J would have regarded MGET as a primary victim, for the reasons given in paras 128 and 129 of the judgment. I am inclined to agree with the judge that the words of Lord Mance (at para 231 of Stone & Rolls) quoted in para 127 would have particular resonance to the present situation.

71.  It is likewise unnecessary to deal with a further submission of Mr Bleach that the Commissioner should be treated as analogous to a bona fide purchaser for value without notice of the fraud.

The special rules of attribution

72.  Mr Bleach submitted that if the Ma Directors were not to be regarded as the directing mind and will of MGET for the purpose of the preparation of the accounts, their knowledge of the manipulation of the accounts should nevertheless be attributed to MGET by the special rules of attribution as a matter of construction of the Ordinance. The question here is whether the attribution of knowledge is required to promote the policy of the substantive rule, or (to put it negatively) whether, if attribution is denied, that policy will be frustrated (McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000] STC 553 at para 44). He pointed out the ramifications of this extend beyond the situation of MGET, as it raises the issue whether a tax assessment could be re-opened without time limit where too much tax was paid as a result of corporate fraud.

73.  I have described the scheme under the Ordinance in the earlier parts of this judgment. The policy of the substantive rule in section 64, in keeping with the entire statutory scheme, is to ensure that there should be no delay in raising an objection to a tax assessment. Hence, a time limit of one month was imposed, which may be extended only in the situations as provided, namely, absence from Hong Kong, sickness or “other reasonable cause”. As mentioned earlier, it is apparent that in section 64, the legislature has struck a balance between the need for finality and the avoidance of delay in raising objections with the need to avoid hardship to taxpayers. That also is the objective of section 70A regarding the correction of errors and omissions in assessments.

74.  The importance of finality and certainty in fiscal legislation is not in doubt. As stated by Mantell J in Sun Yau Investment Co Ltd v Commissioner of Inland Revenue, HCIA 1/1983, 10 February 1984, at para 6: “The object of the Ordinance is to achieve finality within the timetable and procedures laid down”. There is clearly a need for taxation revenue to flow in predictable amounts according to projections as to cash flow, and this certainty should not be undermined by permitting objections to assessments to be raised outside the statutory time limit by freely invoking the ground of “other reasonable cause”.

75.  I am inclined to agree with the Commissioner that if a company is not fixed with knowledge of its conduct by the primary rules of attribution, a denial of attribution would frustrate, rather than promote, the policy behind section 64, as this would deny finality and the avoidance of delay in raising objections, and undermine the protection of the public revenue.  Special rules of attribution should be devised in this situation to promote the policy of the substantive rule in section 64. A company ought to have sufficient internal controls to prevent or discover fraud or error. It could not have been intended by the legislature that a company that has been managed by fraudulent directors should have an escape route to raise an objection to assessment years later on the ground that the fraud was not discovered earlier. And it could not have been intended by the legislature that the negative consequences of the fraud of directors should be borne wholly or in part by the community in the recovery of tax paid owing to the directors’ fraud.

76.  There is also the consideration that the policy of the penal provisions in the Ordinance (sections 80 and 82 such as the failure to make returns, making incorrect returns, giving incorrect information in relation to any matter affecting the liability to tax, making false statement or entry in any return) would be frustrated if the act and knowledge of the directors in the preparation of the tax returns would not be attributed to the company on whose behalf they act. Here, Mr Burns accepted that the special rules of attribution would apply in respect of these penal provisions of the Ordinance, but contended that the special rules do not apply in relation to sections 64 or 70A. I fail to see the reason or logic for this. As submitted by Mr Bleach, the Ordinance should be construed in a consistent manner. There is simply no indication that certain parts of the Ordinance should be interpreted in a different manner from other parts.

77.  Mr Burns submitted there is a public policy that the Commissioner should act in a fair and equitable way in tax affairs and should not insist on her strict legal rights to retain a windfall gain it received from the tax paid by MGET on falsified profits, as against the innocent creditors of the company. In support of this, he cited the dicta of Vaisey J in Sebel Products Ltd v Commissioners of Customs and Excise [1949] 1 Ch 409 at 413 to 414. The situation in that case was very different from the present case, so I do not think the dicta cited are of assistance. I am not persuaded that any such policy that the Commissioner should maintain high standards of probity and fair dealing would necessarily conflict with the policy of maintaining finality and certainty in fiscal matters, or that even if there were conflict, the policy of finality and certainty should give way in the present situation.

78.  I hold that by the special rules of attribution, the knowledge of the Ma Directors in causing the falsified accounts to be prepared should be attributed to MGET. As the company is primarily liable for its conduct, it cannot be said to have been acting reasonably or to have been “prevented” from giving notice of objection within time by its own fraud.

Correction of error under section 70A

79.  This may be dealt with shortly. The judge had applied the same reasoning that by virtue of the Hampshire Land principle the knowledge of the Ma Directors should not be attributed to the company and so the filing of incorrect tax returns could not be said to be a deliberate act of the company for the purpose of section 70A. In Extramoney, supra at 396A to B, it was held that a deliberate act was not an error within the meaning of that section.

80.  For the reasons given earlier, the judge is in error in holding that the knowledge of the Ma Directors should not be attributed to MGET. As the filing of the tax returns based on falsified accounts was a deliberate act of the company, section 70A cannot be invoked to correct the errors in the returns.

81.  Mr Burns relied on the dictum of P Chan J (as he then was) in Extramoney at 396E quoted by Reyes J in para 150 of the judgment which is as follows:

“I accept that in some cases where it can be proved that the profits stated in the accounts of a taxpayer had not been made, this may be sufficient to show that there has been an error justifying a correction in the assessment.”

82.  Hence, he submitted that even a deliberate overstatement of profit may be an error for the purpose of section 70A if in fact no profits were earned. I do not accept this submission. The above dictum of P Chan J was immediately followed by this sentence: “However, each case must be considered in its own factual matrix.” I do not understand P Chan J to have qualified his holding that a deliberate act could not be regarded as an error in that it would not apply to the situation where no profits were made.

Conclusion

83.  I would allow the Commissioner’s appeal and set aside the orders of the judge in quashing the decisions of the Commissioner on 4 December 2009 and 4 February 2010 and his consequential directions that the applications of MGET under sections 64 and 70A of the Ordinance be remitted to the Commissioner for reconsideration. The costs order should also be set aside and that the Commissioner’s costs of the proceedings for judicial review should be paid by MGET.

84.  As costs should follow the event, I would make an order nisi that MGET is to pay the Commissioner’s costs in this appeal.

Hon Fok JA:

85.  I have had the benefit of reading the judgment of Kwan JA in draft.  I am in complete agreement with it and, for the reasons she has given, I too would allow the Commissioner's appeal.  I would only add, in the context of the public policy arguments raised in this appeal, that the attribution to a company of the knowledge of fraudulent directors in the context of the filing of tax returns, whether under the primary rules of attribution or under the special rules of attribution, does not mean that the creditors of that company are without means of recouping losses represented by sums paid as tax on non-existent profits.  First, the company may be able to pursue an action for damages against its former directors for breach of fiduciary duty.  Secondly, an action may lie against the company's auditors, if in breach of their duty to the company to exercise reasonable care to detect the fraud, for damages which may including a sum representing overpayments of tax.

Hon Lam J:

86.  I agree with the judgment of Kwan JA and for the reasons given the appeal should be allowed. I only wish to add that, for my part, I have reservations as to whether an assessment based entirely on the calculations set out in a tax return comes within the scope of section 64. That section provides an avenue to a taxpayer to put forward grounds of objections and he has to be a person “aggrieved by an assessment”.  In a case where the Commissioner accepted the calculation for tax liability in a tax return in its entirety, I have difficulty in understanding how the taxpayer can be said to be so aggrieved and how the assessment can be “objected” to. If that view is correct, the only avenue open to a taxpayer to re-open a case is Section 70A.

87.  Though the point was raised by the court, Mr Bleach did not seek to argue along such line. In the absence of full arguments and given the conclusions reached on the other arguments raised in the case, it is not necessary for the court to consider this question in this judgment. I am content to leave the point open for future debate, but this judgment should not be read as an acceptance by this court that Section 64 can properly be invoked in the above-mentioned scenario.