WEN SHANG KUANG v. COMMISSIONER OF INLAND REVENUE

HCMP 3981/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3981 OF 2002

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J U D G M E N T

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Appeal

1. This is an appeal brought by the Applicant against a departure prevention direction made under s.77(1) of the Inland Revenue Ordinance (Cap. 112). The appeal is brought under s.77(9) of the Ordinance.

2. S.77 of the Ordinance reads as follows:

"(1) If the Commissioner, or an officer of the Inland Revenue Department not below the rank of chief assessor authorized in writing by the Commissioner for the purpose ("authorized officer"), satisfies a District Judge, by statement made on oath -

(a) that a person has not paid all tax assessed upon him; and

(b) that there are reasonable grounds for believing that the person intends to depart, or has departed, from Hong Kong to reside elsewhere,

and if the District Judge is satisfied that it is in the public interest to ensure that the person does not depart from Hong Kong or, if he returns, does not depart again, without first paying the tax or furnishing security to the satisfaction of the Commissioner for payment of that tax, he shall issue a direction ("departure prevention direction") to the Director of Immigration and the Commissioner of Police directing them to prevent the person from departing from Hong Kong without paying such tax or furnishing such security.

(2) The District Judge shall, as soon as practicable after he makes a departure prevention direction under subsection (1), cause a copy of it to be served upon the person who is the subject of the direction, if he can be found, but, whether or not a copy is so served, the direction comes into force immediately upon being issued and continues in force until-

(a) the tax is paid;

(b) security is furnished to the satisfaction of the Commissioner for payment of the tax; or

(c) the departure prevention direction is set aside by the Court of First Instance under subsection (9).

(3) Where -

(a) an immigration officer or immigration assistant (within the meaning of section 2(1) of the Immigration Ordinance (Cap. 115)); or

(b) a police officer,

believes on reasonable grounds that -

(i) a person the subject of a departure prevention direction made under subsection (1) is about to depart from Hong Kong; and

(ii) the Commissioner has not authorized the person to depart from Hong Kong nor has the Court of First Instance suspended or otherwise varied the departure prevention direction so as to permit the person to depart from Hong Kong,

he may take such measures including the use of such force as may be necessary to prevent the departure of that person from Hong Kong.

(4) Where -

(a) a copy of a departure prevention direction has been served on the person the subject of it or the person has been verbally advised of its existence by a person referred to in subsection (3)(a) or (b); and

(b) the Commissioner has not authorized the person to depart from Hong Kong nor has the Court of First Instance suspended or otherwise varied the departure prevention direction so as to permit the person to depart from Hong Kong,

the person commits an offence if he departs or attempts to depart from Hong Kong, and an immigration officer, immigration assistant or police officer may arrest him without a warrant.

(5) Any person who commits an offence under subsection (4) is liable to a fine at level 4 and to imprisonment for 6 months.

(6) Where a departure prevention direction made under this section is in force, the Commissioner may, if he thinks fit, on the written application of the person the subject of the direction or, in the absence of any such application, of his own initiative, authorize, in writing, the person to depart from Hong Kong on one or more occasions as specified in the authorization.

(7) Where -

(a) the tax owing has been paid or security has been furnished to the satisfaction of the Commissioner for payment thereof;

(b) a departure prevention direction is set aside or temporarily suspended under this section; or

(c) the Commissioner authorizes a person to depart from Hong Kong on one or more occasions,

the Commissioner shall, as soon as practicable, notify -

(i) the Director of Immigration; and

(ii) the Commissioner of Police,

that the person is permitted to depart from Hong Kong.

(8) Where a person the subject of a departure prevention direction applies under subsection (6) and the Commissioner does not see fit to authorize his departure, the Commissioner shall, as soon as practicable, serve a notice ("notice of decision") upon the person.

(9) A person aggrieved by a departure prevention direction under subsection (1) or a notice of decision under subsection (8), as the case may be, may appeal to the Court of First Instance which may -

(a) make an order setting aside the departure prevention direction subject to such conditions as the Court may consider necessary, including the supplying of security to the Commissioner as specified by the Court;

(b) make an order temporarily suspending or otherwise varying the departure prevention direction, and the Court may attach such conditions to the suspension or variation as it considers necessary; or

(c) dismiss the appeal.

(10) Service of -

(a) a copy of a departure prevention direction under subsection (2) shall be effected personally on the person who is the subject of it;

(b) a notice of decision under subsection (8) may be effected personally on the person who is the subject of it or by post addressed to that person at his last known place of abode, business or employment.

(11) Where a direction was issued by a District Judge under section 77 as repealed by the Inland Revenue (Amendment) (No. 3) Ordinance 1993 (56 of 1993), that direction shall be deemed to be a departure prevention direction issued under this section and the provisions of this section shall apply to it accordingly.

(12) In this section, "Court of First Instance" (原訟法庭) has the same meaning as in section 2 of the High Court Ordinance (Cap. 4) and includes the Registrar and a Master as defined in that Ordinance.

(13) In proceedings under this section, the production of a certificate signed by the Commissioner or an authorized officer stating the name and last known postal address of the person referred to in subsection (1) and particulars of the unpaid tax assessed upon him shall be sufficient evidence of the amount and a court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal.

(14) The Commissioner or an authorized officer may apply ex parte to the District Court for a departure prevention direction.

(15) In any proceedings in the District Court under this section, the Commissioner or an authorized officer, as the case may be, may appear in person or may be represented either by a legal officer within the meaning of the Legal Officers Ordinance (Cap. 87) or by any other person authorized in writing by the Commissioner."

3. In the present case, the Applicant owes the Commissioner of Inland Revenue a total sum of HK$468,001.71 in unpaid tax. On 7 January 2002, the Commissioner successfully obtained from a District Judge a departure prevention direction in terms of s.77(1). At the time, the Applicant was not in Hong Kong but was residing in the Mainland. He became aware of the departure prevention direction after his return to Hong Kong on 2 May 2002. It is the Applicant's case that he has no means to pay the outstanding tax. He said that since 1998, he has been residing with his wife and elderly mother in the Mainland as the living standard there is much lower than that in Hong Kong, following the collapse of his business and investment in Hong Kong which resulted in his inability to pay the outstanding tax in the first place.

4. According to the evidence, apart from the Commissioner, the Applicant also owes a judgment creditor in excess of $1.4 million plus interest. On 5 December 2002, the Court made a bankruptcy order against the Applicant upon his own application made under s.10(1) of the Bankruptcy Ordinance (Cap. 6), i.e. on the ground that he is unable to pay his debts. Despite some evidence filed in the present proceedings by the Commissioner relating to the possible presence of assets (in the form of proceeds of sale of properties) of the Applicant, the Commissioner did not put in any opposition to the self-bankruptcy proceedings commenced by the Applicant, and the bankruptcy order was made after the Applicant had satisfied the Bankruptcy Court that a case of inability to pay debts under

s.10(1) had been made out.

5. In the present appeal, the Applicant asks the Court to set aside the departure prevention direction.

Section 77

6. The background to s.77 of the Inland Revenue Ordinance has been succinctly set out in Willoughby & Halkyard, Encyclopaedia of Taxation in Hong Kong Vol. 4 paras [22142] to [22365]. The present provisions were introduced in 1993, replacing the former provisions which obliged a District Judge to issue a "stop order" without any discretion, and which did not contain any provisions for a hearing or appeal against such an order: see for instance, Commissioner of Inland Revenue v. Yeung Kwok Ying (1984) 2 HKTC 161; Commissioner of Inland Revenue v. Li Hung To (1987) 2 HKTC 321. The former provisions were thought to be inconsistent with a person's freedom to leave Hong Kong.

7. Under the present provisions, not only must the Commissioner or his senior staff make a statement on oath to satisfy the District Judge that the taxpayer has not paid all tax assessed upon him and that there are reasonable grounds for believing that the person intends to depart, or has departed, from Hong Kong to reside elsewhere, the provisions also require the District Judge to be satisfied that "it is in the public interest to ensure that the person does not depart from Hong Kong or, if he returns, does not depart again, without first paying the tax or furnishing security to the satisfaction of the Commissioner for payment of that tax", before he shall issue the departure prevention direction. In other words, departure should not be prevented unless it is in the public interest to do so. In this regard, due and full payment of outstanding tax by a person intending to emigrate and live somewhere else is, in my judgment, in the public interest. But, in my judgment, that also lays down the outer limit of the provisions, namely that a direction is made, and should only be made, to facilitate or otherwise assist in the recovery of unpaid tax. It is not to be made to punish the non-payment of tax.

8. In other words, if there is a point in keeping the taxpayer in Hong Kong, in terms of recovery of outstanding tax from him, it should normally be in the public interest to do so, and in that case, a departure prevention direction should be made. However, if, for whatever reason, the recovery of outstanding tax will not in any way be facilitated, assisted or otherwise positively affected by the continued presence of the taxpayer in Hong Kong, or adversely affected by his departure, there would be no justification for making or, for that matter, (subject to the Court's jurisdiction in an appeal of the present nature - see below) continuing a departure prevention order. Put another way, if the recovery of outstanding tax will not be affected by the emigration of the defaulting taxpayer, then there would lack the proper public interest to keep the taxpayer in Hong Kong, and thus the issue or continuance of a departure prevention order.

9. The circumstances under which it would not be in the public interest to prevent a defaulting taxpayer from leaving Hong Kong may vary. I have no intention to lay down any exhaustive list here. But in my judgment, insofar as the facts of the present case are concerned, if the defaulting taxpayer really has no means whatsoever to satisfy the outstanding tax or a meaningful portion thereof, then it may well not be in the public interest to prevent him from exercising his basic human right of freedom of movement to depart from Hong Kong.

10. The local provisions have many similarities to the provisions in Australia (ss.14S, 14T, 14U, 14V and 14Y of the Taxation Administration Act 1953 (CTH)). In the Australian provisions, there are express provisions to the effect that if the tax has become "wholly discharged" or "completely irrecoverable" (s.14T(1)), then no "departure prohibition order" may be made by the Commissioner.

11. Although the local provisions do not contain the same or similar built-in exceptions, I am of the view that on the true construction of the local provisions, if the keeping of the defaulting taxpayer from departing from Hong Kong will not in any way facilitate, assist or otherwise positively affect the recovery by the Commissioner of the outstanding tax or a meaningful portion thereof, it will not be in the public interest, within the meaning of s.77(1) of the Inland Revenue Ordinance, to prevent the taxpayer from departing from Hong Kong. Put another way, if the defaulting taxpayer's departure from Hong Kong would not adversely affect the recovery of unpaid tax from him, the requisite public interest in, or justification of, interfering with his freedom of travel will be missing. See Skase v. Federal Commissioner of Taxation (1991) 32 FCR 206; Dalco v. Federal Commissioner of Taxation [1987] 19 ATR 443. By parity of reasoning, if after the lawful making of a departure prevention order pursuant to s.77(1), the circumstances have so changed, or the latest evidence available to the Court so indicates, that the further prevention of a person from departing from Hong Kong would not serve the aforesaid purpose, in my judgment, the departure prevention direction, though lawfully and correctly made initially, should be disturbed.

Nature of appeal

12. This conveniently brings me to the true nature of the present appeal made under s.77(9) of the Ordinance. The provisions do not set out what sort of appeal the Court is hearing. There are many possibilities. It can be by way of judicial review. It can be a rehearing, it can be a hearing de novo or it can be some sort of an amalgam of those types of appeal: see Dalco at p.444, in relation to the Australian provisions. In the Australian provisions, the equivalent departure prohibition order is made by the Commissioner. There are two avenues of appeal, one to the Federal Court of Australia, the other to the Supreme Court of a State or Territory in Australia. In Dalco, Young J, after examining the Australian provisions, and in particular the Australian Constitution and the jurisdiction of the Federal Court, decided that an appeal to the Federal Court has to be read down to dealing with matters of judicial review only, whereas "an appeal to a Supreme Court may be wider" (at p. 445). In Poletti v. Deputy Commissioner of Taxation (1994) 29 ATR 111, the Full Court of the Federal Court of Australia held that an appeal under the Australian provisions (s.14V) to either the Federal Court or a State or Territory Supreme Court involves either Court exercising the judicial power of the Commonwealth, and therefore the appeal is not in the nature of a hearing de novo. The decision is heavily based on Australian legislation that has no local equivalent.

13. In my judgment, the local provisions contain no such complication. Unlike the position in Australia, a decision to issue a departure prohibition direction in Hong Kong is not a pure administrative decision by the Commissioner. It is made by a District Judge who cannot make such a direction unless he is satisfied that the requisite public interest is involved. Secondly, one has no complication arising from any constitutional restraint on this Court's jurisdiction, unlike the position of the Federal Court of Australia under the Australian Constitution. Thirdly, I see no reason to place a narrow construction (i.e. a judicial review type of "appeal") on the local provisions. It is not required by the wording of the provisions. Fourthly, in fact in an appeal like the present one, where after the legitimate and lawful making of a departure prevention direction, it is said that the circumstances have so changed that it is no longer in the public interest to keep a defaulting taxpayer in Hong Kong, in my judgment, it must be immensely sensible to have judicial machinery ready in hand to allow the defaulting taxpayer to appeal against the departure prevention direction with a view to setting it aside on the changed circumstances. If the appeal is limited to a judicial review of the original decision making process that resulted in the grant of the departure prevention direction, the Court may not be entitled to disturb the departure prevention direction even though public interest no longer requires the interference of the taxpayer's basic right to leave Hong Kong. I see no good reason for placing a strait-jacket on the Court's jurisdiction in hearing this type of appeals.

14. For my part, I need not decide definitely the true nature of the present type of appeals, i.e. whether it is by way of a de novo hearing or an appeal akin to an appeal from a decision of the District Court to the Court of Appeal. My present concern is that regardless of the true nature of the appeal to this Court, the Court should, in appropriate circumstances, be entitled to receive further evidence including evidence to update itself on the latest position and where appropriate, decide the appeal according to the latest circumstances. For the reasons given above, I hold that in an appeal of the present type, the Court does have the jurisdiction that I mentioned above.

Effect of bankruptcy

15. Returning to the facts of the present case, the effect of a person's claimed inability to pay the outstanding debts, and in particular the effect of a bankruptcy order against the defaulting taxpayer, must next be examined. In my judgment, if it can be established to the satisfaction of the Court that the defaulting taxpayer really has no ability to pay the outstanding tax or a meaningful portion thereof, and there is no reasonable prospect of his being able to do so in the foreseeable future even if he is to be kept within the jurisdiction during that period of time, there will be no or no further justification for maintaining a departure prevention direction. No public interest will be served by keeping him in Hong Kong indefinitely.

16. In relation to a bankruptcy order, particularly a bankruptcy order resulting from a self-bankruptcy petition, on the one hand, the Bankruptcy Court has been satisfied that a case under s.10(1) of the Bankruptcy Ordinance has been made out, i.e. that the debtor is unable to pay his debts, yet on the other hand, very often, the true state of affairs of a bankrupt cannot be known until the Official Receiver has carried out his investigation into the conduct of the bankrupt and his assets, particularly in a case where the self-bankruptcy is not opposed by creditors.

17. S.12(1) of the Bankruptcy Ordinance sets out the effect of a bankruptcy order as follows:

"(1) On the making of a bankruptcy order the Official Receiver shall be thereby constituted receiver of the property of the bankrupt, and thereafter, except as directed by this Ordinance, no creditor to whom the bankrupt is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the bankrupt in respect of the debt, nor shall proceed with or commence any action or other legal proceedings, unless with the leave of the court and on such terms as the court may impose."

18. In the Australian case of Edelsten v Federal Commissioner of Taxation [1989] 20 ATR 238, Einfeld J held that bankruptcy by operation of law does not cause the bankrupt's debt to become "wholly discharged" or "completely irrecoverable" in terms of s.14T of the relevant legislation. As explained above, this holding is of much importance in the Australian context because of the built-in exceptions in the Australian legislation regarding when a departure prohibition order may be made by the Australian Commissioner.

19. In Hong Kong, as I said, no such built-in exceptions can be found in our provisions. In my judgment, nothing in s.12(1) of the Bankruptcy Ordinance would prevent the Commissioner from applying for a departure prevention direction under s.77(1) of the Inland Revenue Ordinance against a bankrupt taxpayer intending to emigrate or who has already emigrated from Hong Kong. This cannot have been the true intention behind s.12(1) and s.77, as Einfeld J held in Edelsten in relation to similar provisions in Australia. A fortiori, the subsequent bankruptcy of a defaulting taxpayer under a departure prevention direction should not automatically by itself entitle the taxpayer to appeal against the departure prevention direction, asking for its setting aside.

20. In my judgment, the making of a bankruptcy order by the Bankruptcy Court must be very good evidence that the bankrupt taxpayer is unable to pay his debts. However, as I said, until the Official Receiver has properly done his job, there must still remain a distinct possibility of the taxpayer having hidden assets or other yet to be revealed ability to satisfy the outstanding tax or a meaningful portion thereof. If the departure prevention direction is lifted immediately after the making of a bankruptcy order, with the result that the taxpayer can leave the jurisdiction at anytime, the Official Receiver may not be able to complete his investigation into the bankrupt's conduct and dealings, if the bankrupt should depart from Hong Kong in the meantime and never return. In the circumstances, it would be in the public interest to keep a bankrupt taxpayer within the jurisdiction for a further period of time, after the making of a bankruptcy order, in order to enable the Official Receiver to carry out proper and thorough investigation into the conduct and dealings of the bankrupt and his assets, so as to reasonably eliminate the possibility of the taxpayer having hidden assets or yet to be revealed ability to satisfy the outstanding tax or a significant portion thereof. On that basis, in my judgment, the continuation of a departure prevention direction may be allowed.

What should the Court do?

21. What should the Court do then? S.77(9) does not leave the Court with too many choices: the Court may make an order setting aside the departure prevention direction unconditionally or conditionally (such as the supply of security to the Commissioner), the Court may order the temporary suspension or variation of the departure prevention direction, again conditionally or unconditionally, or the Court may dismiss the appeal. Setting aside the departure prevention direction now, conditionally or unconditionally, is not appropriate, on the facts of the present case based on the above analysis, because the investigation of the Official Receiver may or may not reveal any hidden assets or yet to be revealed ability to satisfy the outstanding tax or a significant portion thereof.

22. A temporary suspension of the departure prevention direction now, conditionally or unconditionally, would immediately enable the Applicant to leave Hong Kong prior to the completion of the Official Receiver's investigation process, and any condition imposed (short of the provision of adequate security) to ensure his return to Hong Kong after departure will unlikely to be effective once he has left. According to the Applicant, he is unable to provide any significant security to the Commissioner. Dismissing the Applicant's appeal now is procedurally unsatisfactory, because if the Official Receiver's investigation should reveal that the taxpayer really has no ability to pay, dismissing his appeal now would only mean that the taxpayer will have to go through the appeal process all over again with the expenditure of further costs and time.

23. I am faced with a practical problem, and the matter should be solved in a practical way. In my judgment, the most practical way to resolve the present difficulty is for me to adjourn the hearing of the present appeal for a period of 9 months so as to afford the Official Receiver a reasonable period of time to carry out proper investigation into the affairs of the Applicant and his assets. At the end of this period, I expect the parties to file further evidence in relation to this appeal to update the Court on the latest position. The Applicant may of course ask the Official Receiver to expedite his investigation given his peculiar circumstances and then to prepare something in writing to assist the Court regarding the progress of investigation into the Applicant's affairs and dealings. And of course, if by the end of the 9-month period, the Official Receiver should still reasonably require further time to complete his investigation, the parties may, and are expected to, sensibly put their heads together to postpone the hearing of the present appeal further, pending the completion of the investigation. If any unexpected difficulty or development should surface, the parties may always apply to this Court for further directions which I give the parties liberty to do.

24. If in the meantime, the Applicant wishes to take short trips to the Mainland to visit his family there, he may always make an application to the Commissioner pursuant to s.77(6).

Order

25. For all these reasons, I make an order adjourning the hearing of this appeal to a new date to be fixed, but not before the expiry of 9 months from the date hereof. I give the parties liberty to file further evidence for use at the resumed hearing to update the Court on the latest development and any change in circumstances. I also give the parties liberty to apply for further directions generally. The costs of the appeal are reserved.