WAI YIP UNITED MANUFACTURE CO LTD v. MASTERPOINT PROFESSIONAL LTD

DCCJ 777/ 2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 777 OF 2006

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JUDGMENT

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1.  It is not in dispute that the Defendant had been providing accounting services to the Plaintiff since 1986. This work was to: a) prepare and provide monthly profit and loss accounts and b) prepare and provide annual profit and loss accounts, arrange audit and submit tax returns on behalf of the Plaintiff (“tax service”).

The monthly profit and loss accounts were prepared after receiving from the Plaintiff the relevant / supporting documents like invoices, receipts etc. (“the Documents”). The Plaintiff did not provide the Documents at regular monthly intervals. The Documents accumulated for a few months before release to the Defendant. The Defendant would then prepare and mail to the Plaintiff the relevant monthly profit and loss accounts.

The Defendant provided accounting services but was not a certified public accountancy firm or company. It therefore arranged for audit of the Plaintiff’s accounts by certified public accountants including a concern known as MPL CPA Limited (see Trial Bundle page 161 to 201).

2. The Plaintiff would pay fees for the monthly profit and loss accounts in advance. The Defendant issued its invoice on receipt of the Documents from the Plaintiff. The Plaintiff would pay shortly thereafter.

For the period April 2004 to March 2005, the Defendant charged $2,600 for each set of monthly profit and loss account. From April 2005 on, the charge was increased to $4,500 per set.

3. The Plaintiff’s claims are for:

a)   refund of  fees paid for monthly profit and loss accounts for April 2005 to October 2005 in the total sum of $31,500;

b)   refund of fees paid to the Defendant for providing tax service and applying for tax reduction on a “50:50 apportionment basis” (“50:50 application”) in relation to the financial year 2004-2005. This is in the sum of $71,400 (being ½ of the fees the Plaintiff was debited for); and

c)   damages to be assessed and further or alternative to this, an indemnity for loss and damages including any penalty/ sum the Inland Revenue Department may impose on the Plaintiff.

The claims proceed on the basis that the Defendant failed to provide the accounts and service for which payment had been made.

4.  The Defence is that:

a)       the monthly profit and loss accounts had been prepared in 2 batches and mailed (as usual) to the Plaintiff ; and

b)       the Defendant had done work in providing the tax service and 50:50 application. The Plaintiff, however, kept insisting on the Defendant increasing the Plaintiff’s expenses or decreasing its profits without justification. The Defendant thus could not complete its work. The Plaintiff even wrongfully repudiated its contract with the Defendant for such services. The Plaintiff was thus not entitled to any refund or other relief.

5.  For reasons stated in paragraph 4b) above, the Defendant counterclaims for the balance of agreed fees for tax service and 50:50 application i.e. $71,400. There is also a prayer for damages to be assessed.

6.  Having heard all the evidence in this case, I prefer and accept that called by the Defendant. I dismiss the Plaintiff’s claims.

7.  As far as the Defendant’s counterclaim is concerned, I agree with Counsel for the Plaintiff that the Defendant has to prove damages suffered by it. I see no basis for the Defendant being entitled to the balance of $71,400 unless it proves that that sum represents damages suffered. There is no evidence on this. However, the Defendant has also prayed for damages to be assessed. In the premises, I enter judgment for the Defendant on its counterclaim and make an order that damages (if any) be assessed. Whether the Defendant will get the balance of $71,400 or some other or any amount will depend on the outcome of that assessment.

8.   Subject to cost orders already made, I order the Plaintiff to pay the Defendant’s costs in this action with certificate for Counsel, such costs are to be taxed if not agreed.

9.  The pleadings show a claim by the Plaintiff for return of documents delivered to the Defendant for the preparation of accounts. Pursuant to a Consent Order dated 18 March 2006 (Trial Bundle page 35 to 36) and by making payment of $71,400 into Court, the documents have already been returned. There is no need for me to deal with this aspect of the claim. 

I will now explain the reasons for my decision in this case.

10.  Plaintiff’s case

The Plaintiff was incorporated in 1986 and had been engaging the Defendant to provide accounting/ bookkeeping service and tax service since that time. The Plaintiff is in the manufacturing business. It has an office in Hong Kong and factory in Mainland China. The first witness for the Plaintiff (“PW1”) is a director of the Plaintiff (though there is no direct evidence on this, it would appear that the Plaintiff was started by PW1’s father who controlled, directed and managed its affairs. PW1 subsequently stepped into his father’s shoes and took over the reins of power).

11.  The Defendant had been providing satisfactory service all along and there had been no problems.

12.  In about March 2005, Inland Revenue Department (“IRD”) conducted an audit on the affairs of the Plaintiff.

In the past, the Plaintiff had been claiming deductions for expenses incurred in Mainland China. The Plaintiff did not have supporting documents (receipts, invoices etc.) for such expenses. Instead, the Plaintiff had been claiming for such expenses based on its handwritten list/summary of them (“Handwritten List”). The Defendant had told the Plaintiff that the Handwritten Lists would suffice.

IRD considered the Handwritten Lists unacceptable. Profits tax for the Plaintiff was reassessed for the past 6 years (1998 to 2004). The Plaintiff faced the prospect of having to pay additional taxes, penalties and even prosecution. The Defendant was engaged by the Plaintiff to negotiate with IRD. In June 2005, a deal was struck with IRD under which the Plaintiff was to pay $960,000 as compound penalty (see Trial Bundle page 203 to 207). The Defendant charged the Plaintiff $780,000 for its role in dealing with IRD (see Trial Bundle page 202).

13.  The Plaintiff delivered the Documents to the Defendant for the period April to July 2005 and paid the Defendant’s fees on or about 26 September 2005. On or about 20 November 2005, the Plaintiff delivered to the Defendant the Documents for August to October 2005 together with payment (Trial Bundle page 212 and 213). The Plaintiff never received the monthly profit and loss accounts for April to October 2005 though the Defendant’s fees (total of $31,500) had been paid.

14. “…the supporting documents for the period between April 2004 and March 2005 delivered to Masterpoint for providing bookkeeping services have been retained by Masterpoint for preparing the year-end financial statements. The payments for the bookkeeping services have been  made…After the monthly profit and loss accounts for such period has (sic) been prepared by Masterpoint, Wai Yip has never received any reminder…from Masterpoint that there was any outstanding supporting documents required by Masterpoint to prepare the tax return for the year of 2004/2005” (Trial Bundle pages 40 and 41, paragraph 9. See also pages 208 to 211).

In early November 2005, PW1 contacted the 1^st witness for the Defendant (“DW1”; according to Defence, DW1 was the senior clerk of the Defendant. He handled the bookkeeping and profit and loss accounts for the Plaintiff), the 2^nd witness for the Defendant (“DW2”; DW2 was [and still is] the boss of the Defendant) and a Mr. Law of the Defendant (“Mr. Law”) about the progress of preparing the tax return and auditing for the year 2004 to 2005.

15.  On or about 23 November 2005, DW2 telephoned PW1. PW1 asked about preparation of the annual profit and loss account for 2004/2005 (this had to be audited and was necessary for purposes of the tax return). DW2 informed that there was profit of around $4.5 Million. PW1 was surprised as he had not seen any relevant documents to show this. He pressed for the annual profit and loss account. DW2 indicated to the effect that even the draft had not been completed. DW2 then asked if the Plaintiff would make a 50:50 application (the Defendant had done 50:50 applications for the Plaintiff in the past, e.g. for the year 2003/2004). DW2 mentioned the fees of the Defendant for such application was $142,000 after giving the Plaintiff a discount. Since DW2 could not indicate clearly when the draft annual profit and loss account would be ready, PW1 hung up.

16.  On 29 November 2005, the Plaintiff received a notice of estimated assessment of profits tax from IRD for 2004/2005 (Trial Bundle page 79 and 80). The deadline for lodging an objection was 29 December 2005. PW1 immediately telephoned the Defendant and faxed a copy of the notice to them. PW1 contacted Mr. Law who told him not to worry, that the assessment was provisional only and that the Defendant would issue an objection on behalf of the Plaintiff. Mr. Law informed that the Defendant was still working on the annual profit and loss account. He asked PW1 whether the Plaintiff would pursue a 50:50 application.

PW1 felt the Plaintiff had no choice and thus agreed to make the application. PW1 asked the Defendant’s debit note (“Debit Note”) be sent to the Plaintiff as soon as possible because the Defendant’s practice was to obtain payment in advance. PW1 felt there was no choice because the Defendant had orally indicated that profit for the Plaintiff was $4.5 million and he thought the Defendant saw the need to pursue the application as it would reduce tax payable. PW1 also bore in mind the fact that the annual profit and loss account was not yet ready.

17. On 6 December 2005, the Debit Note was received and signed back by the Plaintiff (Trial Bundle page 81). The Plaintiff paid the deposit of $71,400 the next day. Over the telephone, Mr. Law assured PW1 that the Defendant would complete all applications/ filings with IRD for the Plaintiff by the deadline of 29 December 2005 (see paragraph 16 above).

18. On 9 December 2005 the Defendant asked the Plaintiff to prepare “schedule of costs of sales” (“Schedules”) relating to 3 Clients together with relevant documents in support of the 50:50 application. The Defendant faxed over certain documents as samples of what was expected (Trial Bundle page 85 to 149). As all the Documents had been sent to the Defendant, the Plaintiff retrieved some of them for this purpose.

19. The Plaintiff completed the Schedules in handwriting and sent them to the Defendant together with the relevant documents around 16 December 2005 (see Trial Bundle page 154, 156, 158, 218 to 286).

20. On 19 December 2005, the Defendant rejected the handwritten Schedules and asked that they be done on the computer in Excel format. The Defendant had made 50:50 application for the Plaintiff before for 2003/2004 when handwritten Schedules were used. This time, the Defendant explained that IRD might not approve unless the Excel format was used. The Defendant faxed over samples to the Plaintiff (Trial Bundle page 155, 157 and 159). PW1 repeatedly ask for the draft annual profit and loss account but the Defendant responded by merely insisting on Schedules in Excel format.

21. On 21 December 2005, the Plaintiff received from the Defendant a notice of objection to be sent to IRD against their estimated assessment of profits tax (“Notice of Objection”, see paragraph 16 above). The Plaintiff signed it and it was sent to IRD on 23 December (see Trial Bundle page 82).

22. On or about 28 December 2005, PW1 enquired over the telephone with the DW1 about the April to October 2005 monthly profit and loss accounts. PW1 was told that the Defendant was unable to provide the same (see Trial Bundle page 40, paragraph 8).

On 28 December 2005 the Plaintiff received by fax a draft of the annual profit and loss account for 2004/2005 (Trial Bundle page 215 to 217). PW1 found that expenses incurred in Mainland China had not been included. He contacted DW1. DW1 said that it was the job of DW2 to deal with expenses incurred in Mainland China and that he would get DW2 to telephone PW1.

23. On or about 4 January 2006, the Plaintiff sent a messenger to deliver to the Defendant the Schedules in Excel format. The Defendant refused to sign to acknowledge receipt. DW2 was requested to look at the Schedules to see if they were in order but he refused to do so on the grounds that he had no time.   

24. On 5 January 2006, the Plaintiff received notice from IRD of the rejection of the Notice of Objection. On the same day, PW1 again instructed a messenger to deliver the Excel format Schedules to the Defendant but without asking for any signed acknowledgment. On arrival at the Defendant, the messenger was told that the Schedules were no longer necessary. On or about the same day, the father of PW1 telephoned DW2 to ask for return of the Documents still with the Defendant and indicated that the Plaintiff would get others to deal with its accounts. DW2 agreed.

25. On 11 January 2006 the Defendant faxed over to the Plaintiff a “letter of termination” (Trial Bundle page 287) to the effect that the Plaintiff would annul the agreement with the Defendant for its services and pay $100 to the Defendant in settlement of “services and consultancy rendered…and the annulment of such agreement.” The last paragraph read: “We agree and confirm that we have not and will not have any claim whatsoever against all parties concerned” (“Last Paragraph”). PW1 disagreed with the Last Paragraph. He signed and faxed back the document after deleting the Last Paragraph (Trial Bundle page 84).

26. Despite repeated requests, the Defendant refused to return the Documents still kept by them. The Plaintiff brought the present action.

27. The 2^nd witness for the Plaintiff (“PW2”) was (and still is) a partner of a certified public accountancy firm. PW1 was concerned about the way the Defendant was handling the Plaintiff’s affairs and consulted PW2 sometime in mid-December 2005 and again in January 2006.

28. Defendant’s case

DW1 was the senior clerk of the Defendant. He was mainly concerned with handling the profit and loss accounts of the Plaintiff. He had been doing this since around 2004. DW2 was (and still is) the boss of the Defendant.

29. In March 2005, the Plaintiff was audited by IRD. The Defendant’s case on this aspect is consistent with that of the Plaintiff (see paragraph 12 above) save that:

a)       the Defendant knew the need for supporting documents in claiming deductions for expenses incurred in Mainland China. The Defendant never told the Plaintiff that the Handwritten Lists were sufficient. In fact, the Defendant had all along been telling the Plaintiff the Handwritten Lists were not good enough. The Plaintiff mentioned that the situation in Mainland China was confusing but assured the Defendant that the supporting documents were there. The Defendant trusted and believed the Plaintiff on this;

b)      IRD suspected there was tax evasion because though the Plaintiff reported loss or little profit for the 6 years in question, the personal assets of PW1 and his father had increased appreciably; and            

c)      In the course of handling IRD’s audit, DW2 asked PW1 and his father whether they had other sources of income apart from that of the Plaintiff. They admitted that they had not reported tax in full (for the Plaintiff).

30. For the period April to October 2005, the Plaintiff produced the Documents on 2 occasions. The Defendant, as usual, mailed to the Plaintiff the monthly profit and loss accounts for April to July 2005. This was done on 14 October 2005. The monthly profit and loss accounts for August to October 2005 were mailed to the Plaintiff on 5 December 2005.

31. Due to the audit by IRD, the Defendant reminded the Plaintiff, inter alia, that all expenses to be deducted from the 2004/2005 annual profit of the Plaintiff must be supported by sufficient documents. From April 2005, DW1 had been chasing the Plaintiff for supporting documents in relation to expenses incurred in Mainland China. Around September 2005, the Defendant informed the Plaintiff of the need to file a tax return for 2004/2005 before the extended deadline of 15 November 2005.  Since around mid-September, DW1 intensified his efforts in this aspect and the Defendant had been reminding the Plaintiff to provide “sufficient supporting documents (either arising out of Hong Kong or the Mainland businesses) for the preparation of financial statements and for the provision and arrangement of the tax and audit services.” The Defendant explained that if the supporting documents were insufficient, the Defendant could not finalise the accounts and arrange for audit before the extended deadline. The Defendant further explained that IRD might then impose a fine and estimate the profits tax assessment (see Trial Bundle page 71, paragraph 13).

32. Though the Plaintiff did supply some of the supporting documents, they were insufficient. In any event, the Defendant prepared on 24 October 2005 an annual profit and loss account for 2004/2005 (see Trial Bundle page 307 to 312) based on the limited supporting documents supplied. This showed a profit of some $13 million. This annual profit and loss account was sent to PW1 and DW1 telephoned him about it. PW1 told DW1 to reduce the profit figure and increase the expenses. PW1 told DW1 to increase the expenses to over $10 million so as to result in there being no profit. DW2 learned about this attitude of PW1 and felt that there was a problem.

DW1 responded by insisting that there had to be supporting documents for the expenses. He reminded PW1 of the deadline set by IRD and advised PW1 to approve the net profit figure. DW1 said the Defendant would check again the accounts (to confirm the net profit figure).

33. On 8 November 2005, DW1 telephoned PW1 and mentioned that the figure for expenses in Mainland China should be about $8 million (this was because the Plaintiff had since the beginning of November provided more supporting documents. See Trial Bundle page 650 to 670). PW1, however, insisted that the expenses should be more than $10 million and told DW1 to “fix it.”

34. On 15 November 2005 DW1 telephoned PW1 and confirmed the expenses in Mainland China amounted to about $8 million. PW1 insisted on increasing the expenses (without supporting documents) so as to result in no profit. DW1 told PW1 that if he did not agree with the figures, the necessary accounting documents/ tax return could not be filed with IRD.

35.  On 24 November 2005 the Defendant prepared a revised annual profit and loss account showing net profit of just over $5 million (after taking into account expenses of over $8 million).

DW2 telephoned PW1. DW2 mentioned that the deadline for fling tax return was up and that the accounts showed profit of around $5 million. DW2 reminded PW1 of the audit by IRD and the need for documents in support of expenses claimed. PW1 indicated the reluctance to pay tax and asked DW2 to “fix it”. DW2 refused to falsify the accounts. DW2 told PW1 that if he agreed on profits of around $5 million, the 50:50 application could be made and, if successful, would result in IRD reducing the profit figure by ½. DW2 went on to explain that there were 2 ways to pursue the 50:50 application: all supporting documents could be submitted at the time of making the application or the application can be made and supporting documents submitted later. The latter approach, however, might lead to IRD raising more queries. DW2 emphasised the need for PW1 to agree on the profit figure.

On the instructions of DW2, DW1 mailed a copy of the revised annual profit and loss account to the Plaintiff the same day.

36. On 1 December 2005, the Defendant received from the Plaintiff via fax a copy of notice of estimated assessment of profits tax from IRD dated 29 November 2005 (see also paragraph 16 above). On 2 December, the Defendant asked the Plaintiff whether it had decided to make the 50:50 application. The Defendant indicated that if the application was not made, auditing of the Plaintiff’s financial statements could be arranged and completed by 28 December. If the Plaintiff decided to make the 50:50 application, then it had to supply sufficient supporting documents and, hopefully, the application could be filed with IRD by 26 January 2006. The Defendant reminded the Plaintiff that if they missed the deadline of 28 December, IRD might re-estimate profits tax again and impose further fine on the Plaintiff. Nevertheless, the Plaintiff agreed to make the 50:50 application. A colleague of DW1 faxed to the Plaintiff samples of documents the Plaintiff had to provide for the application (see examples at Trial Bundle page 85 to 149, 150 to 153, 675 and 708). The Plaintiff’s election was to submit all supporting documents together with the application.

37. On 6 December 2005, the Debit Note was faxed over to the Plaintiff. On 9 December, the Plaintiff paid $71,400 as a deposit.

38.  The Plaintiff failed to provide the Defendant with sufficient supporting documents to make the 50:50 application. On 16 December, DW1 telephoned PW1 that information provided by the Plaintiff was not enough. For example, the Plaintiff failed to indicate who the Directors were, who was in charge of the office, who was in charge of machinery. DW1 marked on certain documents to indicate to the Plaintiff what was missing (see Trial Bundle page 710 and 731 – the circled areas on page 710 indicated information was missing).

39.  DW1 reminded the Plaintiff that IRD would not consider any objection to their estimate assessment of profits tax unless the audited financial statements of the Plaintiff were filed together with the objection. Despite this, the Plaintiff asked the Defendant to lodge the objection. On 24 December 2005, the Notice of Objection was lodged. On the same day DW1 “did remind the Plaintiff …by phone that the IRD would reject our objection. The Plaintiff still refused to approve the said net profit nor (sic) the said revised profit” (see Trial Bundle page 75, paragraph 24). On 28 December 2005, the Plaintiff asked for a copy of the annual profit and loss account that showed the profit figure of about $13 million. The Defendant faxed a copy over.

40.  DW1 did refuse documents sent by the Plaintiff in connection with the 50:50 application. The reason was not because they were not in Excel format but because certain information was missing, the original invoices/ receipts were not attached and DW1 was required to sign to acknowledge that everything was in order. DW1 never said DW2 handled the Plaintiff’s expenses incurred in Mainland China. DW2 was the boss and did not do the accounting work. It was up to employees like DW1 to do such work.

41.  On 4 January 2006, DW2 contacted PW1. DW2 said that if the (around) $5 million profits figure was agreed by PW1, then all filings could immediately be made with IRD. DW2 emphasised that the Defendant would not make false accounts. DW2 again explained the 2 approaches in pursuing the 50:50 application. DW2 stressed that the Defendant could not do anything unless PW1 agreed on the profits figure. PW1 replied that the Plaintiff was taking part in an exhibition and that business came first. He merely told DW2 to follow up on the 50:50 application first.

42.  On 7 January 2006, PW1’s father telephoned DW2 but could not reach him.

43.  On 9 January 2006, DW2 returned call to PW1’s father. In essence, PW1’s father said that there was no need for the Defendant to do any more work for the Plaintiff. DW2 said that all necessary work had been done by the Defendant and the only thing outstanding was the Plaintiff’s agreement on the profits figure. DW2 asked for payment of the balance of $71,400 (Debit Note refers). Ultimately, DW2 agreed with PW1’s father not to insist on the balance.

44.  On 10 January 2006, as a matter of standard procedure, the Defendant sent to the Plaintiff a “letter of termination”. On 11 January, the Plaintiff signed back this document but with certain deletions (see paragraph 25 above). DW2 was surprised and therefore telephoned PW1’s father to ask about the deletion. The father replied that it was his son, PW1, who made the deletion. Thereupon, DW2 said that since PW1 did not join in the agreement between himself and the father, the Defendant would claim for the balance of $71,400.

45.  Matters considered

I do not think PW2’s evidence was of any relevance or value to this case. The main points of his evidence were:

a)    the Defendant was overcharging the Plaintiff (at least for negotiating with IRD over the audit and making the 50:50 application);

b)    the draft annual profit and loss account prepared by the Defendant was defective in that it calculated expenses on a cash as opposed to an accrual basis; and

c)    he gave his interpretation as to what the IRD audit was all about.

46.  As far as a) is concerned, I do not see the relevance of any overcharging in this case. In any event, if the Defendant were getting a more than handsome reward from the Plaintiff, I would have thought that it would try its best to keep this hen that lay the golden eggs instead of suddenly (and quite inexplicably) become tardy and highhanded towards the Plaintiff. Regarding b), the Plaintiff’s case is not founded on the basis that the Defendant used the wrong method to do the accounts. Regarding c), PW2 was not party to the IRD audit. I decline to give any weight to his views or interpretation regarding the audit.

47.  Even on the Plaintiff’s case, there had been no problems with/ from the Defendant for the past 20 years. There had not been any cause for complaint. Why was there this sudden change in the Defendant (as alleged by the Plaintiff)? I accept Defence evidence that it regarded the Plaintiff as a good and important client.

48.  On the Plaintiff’s version (see paragraph 12 above), only a simpleton would not blame the Defendant for mishandling the accounting/ tax affairs of the Plaintiff for 6 tax years thus resulting in the IRD audit and penalty being imposed on the Plaintiff. It was plain that the Defendant wrongfully told the Plaintiff that in claiming deduction for expenses, the Handwritten Lists would suffice. I am convinced that PW1 is not a simpleton. I find PW1’s forgiving and even magnanimous attitude towards the Defendant (e.g. paying their fees, considering that the Plaintiff had also to shoulder some of the blame, continuing to engage the Defendant) inexplicable.

49.  The Defendant’s wrong resulted in the Plaintiff having to pay a penalty of $960,000. The Plaintiff ran the risk of prosecution and having to pay treble taxes. The irony of it all was that the Plaintiff had also to pay the Defendant’s fees of $780,000 to negotiate with IRD.  I find it difficult to understand why, based on the Plaintiff’s version, PW1/ the Plaintiff would pay the Defendant at all.

50.  PW1 said that he was shocked when the Defendant told him (before meeting with IRD) that the Defendant had missed out reporting $4 million (in tax). PW1 said he was unhappy with the Defendant for not advising the Plaintiff to keep/ retain receipts/ invoices etc. for expenses incurred in Mainland China.  Why then would the Plaintiff retain the Defendant to negotiate with IRD? Why would the Plaintiff continue to use the services of the Defendant in bookkeeping and tax service? I do not think the explanation can be found in the fact that the Defendant had been servicing the Plaintiff for some 20 years apparently without mishap. The IRD audit surely would have sent out a clear message that the Defendant had been mishandling the Plaintiff’s account for 6 years. I do not accept PW1’s assertion that apart from the Defendant he did not know whom to turn to.

51.  PW1 said that he considered the Plaintiff was also to bear some of the blame because it was the practice of the Plaintiff not to keep invoices/ receipts etc. The rationale for this line of thinking defies me. I also find it incredible that PW1 would believe or rely on the Defendant saying that Handwritten Lists would suffice. PW1’s common sense and his experience as a businessman would have told him otherwise.

52.  I find the Defendant’s version regarding this audit more probable. Both PW1 (and his father) had been holding back on reporting profits. There was no fault on the part of the Defendant. That was why the Plaintiff continued to retain the services of the Defendant; PW1 was satisfied with the Defendant in negotiating the settlement with IRD and the Plaintiff paid the Defendant’s fees of $780,000. When I think more about it, I consider this episode of the IRD audit to be not irrelevant to the issues in this case. Not only does it reflect on credibility but also it explains why PW1/ the Plaintiff refused to confirm the profits figure for 2004/2005 – the Plaintiff just wanted to avoid having to pay anything more to IRD and wanted the Defendant to “fix it”. Did the Defendant not “fix it” in negotiating with IRD over the audit?

53.  In the course of his evidence, PW1 made for the first time  the assertion (a somewhat startling one, I must say) that the Plaintiff had not yet received from the Defendant the monthly profit and loss accounts for 2004/2005 i.e. monthly profit and loss accounts for 19 months were outstanding.  I think there is much force in Defence Counsel’s argument that this assertion was made because PW1 realised that if these monthly profit and loss accounts had been prepared, then it would have been easy for the Defendant to prepare the annual profit and loss account for that financial/ tax year. PW1 realised that there would then be no reason for the Defendant not finalising and providing such annual account earlier save for the reason the Defendant put forward i.e. PW1 wanted the Defendant to increase expenses or deflate profits without justification. I reject this assertion of PW1.

54.  Exhibit D1 is the file jacket for holding papers in relation to the Plaintiff for 2005/2006. Defence evidence was that there would be such a file jacket for each Client. After all necessary work was done, the file jacket would be discarded. There are slips of paper attached to Exhibit D1. Brief entries are made on these slips to record work done or contact with the Client i.e. PW1 / the Plaintiff. In Trial Bundle page 735-1 to 735-6, one finds a copy of Exhibit D1.

Trial Bundle pages 453 to 573 contain handwritten notes (“handwritten notes”) of events relevant to this case. These notes, on Defence evidence, were prepared on advice of Defence solicitors. The handwritten notes contain the “collective memory” of those at the Defendant who dealt with the Plaintiff (on matters relevant to this case).

Trial Bundle pages 430 to 451 contain the typed version (“typed version”) of the handwritten notes.

It is clear, however, that the contents of handwritten notes and the typed version are not exactly the same (e.g. entries relating to 15 September [page 430 and 453], 16 to 21 September [page 430 and 454] and 22 September [page 430 and 455]). The reason or cause of such incongruence was not explored at trial. The handwritten notes are covered by a hearsay notice filed by Defence solicitors on 6 September 2006. There is no evidence regarding the circumstances in which the “collective memory” was gathered. As already pointed out, the contents of the handwritten notes and the typed version are not exactly the same. I am not willing to give weight to the handwritten notes.

For all the documents just now mentioned, I regard that at best they can only be used as aide memoire, a mnemonic device.

55.  DW1 admitted that certain aspects of the Defence case were not recorded in the handwritten notes or the typed notes e.g. that if supporting documents for the 50:50 application were produced later, the chances of success were reduced; that if PW1 did not confirm the profit figure, the 50:50 application could not be made and that the April to October 2005 monthly profit and loss accounts had been mailed out. For some of the entries with missing information, DW1 could not explain because they were recorded by others. For some, like the mailing of accounts, DW1 said that all along the Defendant had been operating that way.

DW2 gave evidence about his telephone conversation with PW1 on 24 November 2005. In evidence, DW2 said he explained to PW1 that in making the 50:50 application, supporting documents could be submitted to IRD later though IRD would then be making more queries. DW2 admitted that all this is not recorded in his witness statement (Trial Bundle pages 58 to 65). DW2, however, explained that entries by his staff in the copy of Exhibit D1 and the handwritten notes (Trial Bundle pages 735.4 and 507/508 respectively) were references thereto.

In cross-examination, it was pointed out that that other bits of evidence given by DW2 had not been documented e.g. PW1 choosing to make the 50:50 application by submitting all supporting documents at the time of application is not recorded in DW2’s witness statement or the handwritten notes. I should add that the evidence of PW1 (and his father) admitting that they had not fully reported profits of the Plaintiff is nowhere mentioned in DW2’s witness statement (see paragraph 29 c) above).

This is not the first time that a witness has given evidence on matters not mentioned in his witness statement or in other documents. The Court will not write off such evidence simply because of the absence of its previous mention. Both DW1 and DW2 appeared before me to give evidence. Having observed and listened to them, I am not perturbed by the fact that parts of their evidence had not been ventilated/ recorded previously. I felt that DW2 did not really want to mention PW1 (and his father) not reporting tax in full. The exigencies of the trial, however, impelled him to make the revelation. All in all, I consider both DW1 and DW2 were trying their best to recount truthfully and accurately what they knew about the case. 

56.  DW2 telephoned PW1 after the extended deadline of 15 November 2005 for filing a tax return (see paragraphs 31 and 35 above). I thought Defence Counsel tried to make a point out of DW2 not broaching with PW1 prior to the deadline the option of making a 50:50 application. DW2 said there was no particular reason for his not mentioning it prior to the deadline. DW2 explained that in any event the Defendant was waiting for the Plaintiff to confirm the profits figure and to give further instructions. I see nothing untoward in any of this.        

57.  I do not think anything turns on the fact that the Defendant had not sent anything in writing to the Plaintiff to record, for example,  supporting documents were missing; the Plaintiff’s refusal to confirm the profit figure or the Plaintiff opting for a particular method in making the 50:50 application (i.e. submitting all supporting documents with the application). Even on the Plaintiff’s case, the parties seemed by and large content to simply communicate over the telephone. 

58.  I do not think anything turns on the wording of the “letter of termination” or the relationship between the Defendant and MPL CPA Limited (see paragraph 1 above).

59.  DW1 was not able to explain why the Plaintiff on 28 December 2005 wanted a copy of the earlier (and superseded) version of annual profit and loss account (which showed profits of some $13 million). I think PW1 is the only person who can provide the explanation.

60.  This trial involves a civil dispute. The Court decides issues of fact on a balance of probabilities. The Court is entitled to prefer the case/evidence of one party to that of the other. I prefer and accept the evidence called by the Defence. I consider appropriate the orders stated in paragraphs 6 to 8 above.