XCHRX NG KUEN WAI TRADING AS WILLIE TEXTILES v. DELOITTE TOUCHE TOHMATSU (A FIRM) AND ANOTHER

HCA 7266/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 1998

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J U D G M E N T

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1. The Plaintiff brought this action against the 1st and the 2nd Defendants. The background of the action as appearing from the Amended Statement of Claim is that in March 1994, the Inland Revenue Department ("IRD") indicated to the Plaintiff that it intended to carry out an investigation into the tax affairs of the Plaintiff and also the group of companies to which the Plaintiff was the beneficial owner. The Plaintiff handed over records of the group's accounts to the IRD for the purpose of their investigation. The Plaintiff also appointed the 1st Defendant to act for the Plaintiff in respect of the investigation by the IRD. In the course of the investigation, the 1st Defendant advised the Plaintiff (a) to pay a total of HK$399,500.00 in advance to the Government pending the outcome of the investigation, (b) to accept that as the basis for the assessment of additional tax for the tax years between 1987 to 1999, there should be an additional assessable profits of $10 million (c) to pay or agree to pay additional tax in the sum of $1,565,000.00 calculated on the basis of additional assessable profits in the total sum of $10 million for the relevant tax years, and (d) to pay or agree to pay compound penalty in the sum of $1,935,000.00 (see paragraph 11 of the Amended Statement of Claim). The Plaintiff accepted the advice and acting on the advice, the Plaintiff did pay the sum of $399,500.00, and entered into an agreement with the IRD "whereby the Plaintiff and or the group agreed that the assessable profits of the group had been understated for the said tax years to the extent of $10,000,000.00 and the 2nd Defendant agreed to accept that amount and not to carry out further investigation" (see paragraph 12 of the Amended Statement of Claim). As a direct result of the agreement, the IRD wrote to the Plaintiff and the group setting the compound penalty to be the sum of $1,935,000.00 and in a separate letter, informed the Plaintiff that approval had been given for the Plaintiff or the group to pay additional tax in the amount of $1,565,000.00 calculated on the basis of additional assessable tax liability of $10 million. It was further pleaded that also acting on the faith and advice of the 1st Defendant, the Plaintiff or the group entered into a further agreement with the IRD to pay the penalty and the additional tax (see paragraph 14 of the Amended Statement of Claim). It is not clear from the pleading as to whether the Plaintiff had paid the amount of compound penalty and the additional tax in the total sum of $3.5 million or not. I was told by the parties that in fact this amount had not been paid although there was a demand for the payment of this sum. It was alleged in paragraph 15 of the Amended Statement of Claim that at the time of entering into the contracts with the IRD both the Plaintiff and the 2nd Defendant honestly and mistakenly believed that the tax liability of the Plaintiff or the group had been understated in the tax returns for the relevant tax years (see paragraph 15 of the Amended Statement of Claim). It is not clear as to whether the Plaintiff would say that in truth there was no understating of tax liability in the tax returns submitted by the Plaintiffs at all. What the Plaintiff had alleged in paragraph 18 of the Amended Statement of Claim is merely that as a result of the negligence of the 1st Defendant, the documents submitted to the IRD in the course of the investigation were inaccurate and misleading in that they exaggerated the profit of the group for the relevant tax years. In consequence of the negligence, it is pleaded that the Plaintiff had suffered the loss and damages in the sum of $399,500.00 and also the sum of $3.5 million paid to the Government. It was also pleaded that upon discovering the inaccuracy of the advice of the 1st Defendant, the Plaintiff had sought to rescind the agreement with the IRD. In paragraph 21 of the Amended Statement of Claim, the loss and damages suffered by the Plaintiff was particularised to include the amount of $215,000.00 (which was the fee paid to the 1st Defendant) and also the sum of $3.5 million (which was the additional tax and the penalty paid). It was also pleaded that the loss and damage suffered by the Plaintiff was the result of the negligence of the 2nd Defendant or its servants or agent. The particular of negligence relied on were that (a) there was a willful ignoring of the fact that the basis presented by the 1st Defendant to the 2nd Defendant was inaccurate and improper; and (b) wrongfully and improperly causing an assessment for additional tax liability to be made against the Plaintiff. The remedies sought against the 2nd Defendant were for the repayment of the sum of $399,500.00, declaration that the contracts with the IRD were made under mistake and were wholly void as against the Plaintiff and ought to be set aside, declaration that the notices of additional assessment dated 29 September 1997 were invalid, and also damages for negligence.

2. By a summons issued on 3 June 1998, the 2nd Defendant sought to strike out the claim against the 2nd Defendant on the grounds that the Statement of Claim discloses no reasonable cause of action, it is frivolous and vexatious and it is an abuse of the process of the Court. On 26 November 1999, Master Jones allowed the application of the 2nd Defendant and dismissed the claim against the 2nd Defendant. The Plaintiff appealed against the Master's decision.

Claim for the return of $399,500.00

3. It is not clear from the Amended Statement of Claim as to what was the basis for the claim for the recovery of the sum of $399,500.00. On the pleading, this amount was not paid in pursuance of any agreement made between the Plaintiff and the 2nd Defendant. In this respect it is to be noted that in paragraphs 15 and 16 of the Amended Statement of Claim, there was no allegation that this amount of $399,500.00 was paid under any mistake at all, nor is there any allegation that the Plaintiff would not have paid this sum but for certain mistakes made by the Plaintiff. In the circumstances the Plaintiff has not pleaded any reasonable cause of action for the recovery of this amount of $399,500.00.

4. At any rate, it is clear from paragraphs 11 and 12 that this sum of $399,500.00 was paid in order to settle and terminate the investigation then being conducted by the IRD, and for reasons which I will go into later in relation to the agreement relating to the $3.5 million, the amount so paid is not recoverable.

Rescission of the Agreement of 16 September 1997 and the agreement for the payment of the $3.5 million

5. It has not been alleged in the pleading that the agreement of 16 September 1997 is not enforceable by reason of uncertainty, or that the same is not supported by consideration, or that the 2nd Defendant was in lack of power in entering into such agreement. The Plaintiff sought to set aside the agreement on the ground that the same was made under a common mistake of both the Plaintiff and the 2nd Defendant. However as I have pointed out earlier, it is not clear as to exactly what the alleged mistake was. All that was pleaded in paragraph 18 was that in fact the documents information and replies supplied by the 1st Defendant to the IRD in the process of the investigation were inaccurate and misleading and that they had exaggerated the profits of the group for the relevant tax years. However it has not been alleged that if the true position was shown, the Plaintiff or the group should not have been subject to further assessment of tax for the relevant years. Nor is it pleaded that in truth the Plaintiff should not be assessed for additional assessable profits for the relevant years at the sum of $10 million; nor is it alleged that the assessment of $10 million was an over assessment.

6. The law of restitution does allow a person who has made payment when in fact he is under no liability to do so to recover the money paid in certain circumstances. As a first instance Judge, I am happy to adopt the summary of this aspect of the law by Lord Goff in Woolwich Equitable Building Society v IRC [1993] AC 70 at 164D to 166B, where he summarised the existing law at the level of the Court of Appeal at the time of his decision. I will set out the parts of the summary which have direct application to the present case (emphasis added):

"(1) Whereas money paid under a mistake of fact is generally recoverable, as a general rule money is not recoverable on the ground that it was paid under a mistake of law. This principle was established in Bilbie v Lumley (1802) 2 East 469. It has however been the subject of much criticism, which has grown substantially during the second half of the present century. The principle had been adopted in most, if not all, Commonwealth countries; though in some it has now been modified or abandoned, either by statute or by judicial action.....

(3) Where a sum has been paid which is not due, but it has not been paid under a mistake of fact or under compulsion as explained under (2) above, it is generally not recoverable. Such a payment has often been called a voluntary payment and so as (sic) irrecoverable in the following circumstances.

(a) The money has been paid under a mistake of law : see (1) above. See, e.g. Slater v Burnley Corporation, 59 LT 636 and National Pari-Mutuel Association Ltd v The King 47 TLR 110.

(b) The payer has the opportunity of contesting his liability in proceedings, but instead gives way and pays: see Sargood Brothers v The Commonwealth, 11 CLR 258, especially at p.301, per Issacs J. So where money has been paid under pressure of actual or threatened legal proceedings for its recovery, the payer cannot say that for that reason the money has been paid under compulsion and is therefore recoverable by him. If he chooses to give way and pay, rather than obtain the decision of the court on the question whether the money is due, his payment is regarded as voluntary and so is not recoverable: see e.g. William Whiteley Ltd v The King 101 LT 741.

(c) The money has otherwise been paid in such circumstances that the payment was made to close the transaction. Such would obviously be so in the case of a binding compromise; but even where there is no consideration for the payment, it may have been made to close the transaction and so be irrecoverable. Such a payment has been treated as a gift: see Maskell v Horner [1915] 3 KB 106, 118 per Lord Reading CJ....."

(I should mention that Lord Goff has in fact extended the then existing law as he summarised it. However the only extension he made to the law was that he held that money paid by a citizen to a public authority in the form of taxes or other levies paid pursuant to an ultra vires demand by the authority is prima facie recoverable by the citizen as of right (see page 177E-F)).

7. In the present case, it is plain from paragraph 12 of the Amended Statement of Claim that the reason for entering into the agreement with the IRD was that the Plaintiff would want to put an end to the investigation by the IRD on the Plaintiff's or his group's liability for under reporting their tax liability in the tax returns of the relevant tax years. It is a binding compromise bona fide entered into by both the Plaintiff and the IRD. There was ample consideration for this compromise and I see no reason for setting aside this contract. It is trite law that once a compromise is reached, it is not open to the party against whom the claim is made to avoid the compromise on the ground that the claim was in fact invalid, provided that the claim was made in good faith and was reasonably believed to be valid by the party asserting it (see Chitty on Contracts 28th edition paragraph 23-013). In the present case, there is nothing in the pleading to suggest that the IRD did not bona fide believe that it was entitled to investigate into the tax affairs of the Plaintiff or his group. Indeed in paragraph 15 of the Amended Statement of Claim, it is expressly pleaded that at the time, both the Plaintiff and the 2nd Defendant bona fide believed that in the tax returns for the relevant years filed by the Plaintiff the tax liability had been understated. Accordingly I see no ground for setting aside the contract pleaded in paragraph 12 of the Amended Statement of Claim.

8. The Plaintiff relied heavily on the decision of Steyn J in Associated Japanese Bank (International) Ltd v Credit Du Nord S.A. [1989] 1 WLR 255. In that case the Court held that a contract of guarantee was void for mistake because the guarantee was given on the basis of the assumption that the subject matter of the principal security, i.e. the machinery existed. As it turned out the machines did not exist the Court held that the contract of guarantee was void. It was argued that likewise when the Plaintiff and the 2nd Defendant made the agreement of 16 September 1997, they both made the basic assumption that the Plaintiff or his group had under declared the assessable profits for the relevant years. This assumption was a mistake and so the contract should also be avoided.

9. The difficulty in the Plaintiff's way is that when the IRD decided to investigate into the tax affairs of the Plaintiff, at the most one could merely assume that the IRD would have grounds to believe that the Plaintiff or his group had under-declared their assessable profits. Whether it was in fact so was to be confirmed by the result of the investigation. The investigation was stopped by reason of the agreement. As I have pointed out already, the consideration given by the IRD for this agreement as pleaded was to stop the investigation. Thus this is not simply a contract to agree on the quantum of the under-declared assessable profit. This was a contract of compromise to stop the investigation. In an agreement to compromise, the basic and fundamental underlying assumption is not whether the views of the parties are right or not but is the existence of a bona fide dispute or differences in the views of the parties. In the present case, such disputes and differences did exist and at least there was no suggestion that in fact there was no or could be no such bona fide disputes or differences. Accordingly I do not think that the case of Associated Japanese Bank would assist the Plaintiff.

10. It is plain from paragraph 13 of the Amended Statement of Claim that a direct result of the agreement whereby the Plaintiff had accepted that he or his group had under stated the assessable profits for the relevant years to be $10 million would be that he would be liable for the penalty of $1,935,000.00 and additional tax liability of $1,565,000.00. Thus the payment of these sums totally to $3.5 million, even if made, would be payment made in pursuance of a binding contract. There is no ground to claim for the repayment of this amount.

11. I do not think that the fact that the Plaintiff had pleaded that there was another agreement for the payment of the sum of $3.5 million would give rise to a new cause of action. It is plain that any agreement to pay and any payment of the $3.5 million would flow directly from the contract to compromise or to put an end to the IRD's investigation. As that contract is binding, I see no cause of action for the setting aside of the contract for the payment of the sum of $3.5 million or for the recovery of that sum.

Negligence

12. It is also alleged that there is a cause of action against the 2nd Defendant in negligence. In order to succeed, it is necessary for the Plaintiff to show both a duty of care and also damages arising from the breach of the duty of care.

13. In the present case, I do not think that a duty of care exists in the light of Section 70 and 70A and the general scheme of the Inland Revenue Ordinance. In my view, the effect of Section 70 of the Inland Revenue Ordinance is that the way to challenge an assessment is by way of appeal and in the absence of any appeal, the assessment is conclusive. The same section also provides that where the amount of the assessable income or profits or net assessable value has been agreed to under section 64(3), the amount is also conclusive for all purposes of the Ordinance. Section 70A provided that if within 6 years from the year of assessment or within 6 months of the notice of assessment was served, it is established to the satisfaction of the tax 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 or by reason of any arithmetical error or omission in the calculation of the amount of the net assessable value, assessable income or profits assessed or in the amount of the tax charged, the tax assessor shall correct such assessment. It would appear to me that the scheme of the Ordinance is that rather than the IRD owing a duty of care to the tax payers in assessing the tax payable, it is the duty of the tax payer to raise objection to the assessment made by the tax assessor by way of appeal. If he fails to do so, the assessment would become conclusive. Likewise if he should appeal, then the assessment will abide by the result of the appeal. If there should be an agreement on the assessable profit, then he cannot later on object to the agreed assessable profit. There is a limited right to ask the tax assessor to correct an over assessment under Section 70A. This right is only exercisable within 6 months from the notice of the assessment. In the present case the notices of additional Assessments were dated 29 September 1997. The writ herein was issued on 7 May 1998. There was no suggestion that within 6 months of the notices the over assessment had been brought to the attention of the tax assessor. At any rate, since the assessable profits for the relevant years were agreed and were therefore conclusive, there was no room for any revision.

14. Furthermore under section 75(4) of the Ordinance, it is clearly provided that where proceedings were brought for the recovery of tax, the court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal. Hence it is plain that it is not a defence to say that the tax was wrongly assessed because of the negligence of the IRD.

15. Thus I am of the view that looking at the scheme of the Ordinance, the legislative intent is that the tax liability of the tax payer shall not be affected by any consideration that the IRD was negligent in assessing the tax. It was thus rather strange that although negligence could not be a defence to the claim for tax, the IRD could nevertheless be made liable for negligence resulting in almost every case that excessive tax would become payable by the tax payer.

16. The Plaintiff relied on Fellowes v Rother District Council [1983] 1 All ER 513 in support of the contention that there was a duty of care on the part of the IRD as a public body towards the plaintiff as a tax payer. In that case, Robert Goff J said (at page 522b-c):

"From these authorities the following principles can, as I understand it, be derived. Where a plaintiff claims damages for negligence at common law against a public body or official purporting to act in pursuance of a power conferred by statute or other legislation, he can only succeed if he can show (1) that the act complained of was not within the limits of a discretion bona fide exercised under the relevant power, (2) that having regard to all the circumstances including the legislation creating the relevant power, there was sufficient proximity to create a duty of care on the defendant to avoid damage to the plaintiff of the type complained of, and no ground for negativing (or reducing or limiting) such duty of care, (3) that it was reasonably foreseeable by the defendant, or by those for whom he was vicariously responsible, that the act complained of was likely to clause damage of the type in fact suffered by the plaintiff by reason of such act."

17. I accept the principles set out by Robert Goff J. Applying them to the present case, it is plain that the 2nd Defendant is entitled to enter into the agreement with the Plaintiff on the assessable profits of the Plaintiff or his group of companies. It is an act that is well within the scope of his discretion. Furthermore, as I have indicated above, it is obvious that for the purpose of the collection of the revenue, the scheme adopted by the Inland Revenue Ordinance is such that it would be inconsistent to cater for the co-existence of a duty of care on the part of the 2nd Defendant to the tax payer. In other words, there were grounds to negative the duty of care.

18. Even if I am wrong on the existence of the duty of care, in order to succeed in a claim on negligence, the Plaintiff would have to show that he suffered actual damages as a result of the negligence of the 2nd Defendant. In the present case, I see no ground for saying that the sum of $215,000.00 being the amount of fee payable to the 1st Defendant could arise from the alleged negligence on the part of the 2nd Defendant. As to the amount of penalty and additional tax paid, it would appear to me (as it was so asserted in paragraph 13 of the Amended Statement of Claim) that this amount became payable as a direct result of the agreement made between the Plaintiff and the 2nd Defendant. In the circumstances, any loss suffered by the Plaintiff was not caused by the alleged negligence on the part of the 2nd Defendant but was caused by the Plaintiff voluntarily entering into the agreement with the 2nd Defendant. For reasons given above, I do not consider that the Plaintiff could set aside the agreement, and it must also follow that the claim for negligence could not improve the Plaintiff's position.

19. In these circumstances, I am of the view that the Master has come to the right conclusion and the appeal is dismissed with cost.