XCHRX LEE SEOW PHENG v. KING PACIFIC INTERNATIONAL HOLDINGS LTD.

HCA1407/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1407 OF 2001

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J U D G M E N T

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1. This is an application by the plaintiff for summary judgment.

2. Most of the primary facts giving rise to this action are not in dispute. They may be summarised as follows.

Background

3. Pursuant to an employment agreement dated 1 May 1994, the plaintiff served as the defendant's director between 1 May 1994 and 30 June 1997 when he resigned. Clause 6 of the agreement set out the remuneration package. In short, the plaintiff received a monthly salary of $40,000, an annual salary from 1 May 1996 as the defendant's board may approve, reimbursement of all reasonable out-of-pocket expenses, benefits under medical schemes and return airfare to Singapore. (The plaintiff is a Singaporean recruited to work for the defendant in Hong Kong.) In particular, Clause 6(G) provided that "[l]ocal tax payable, if any, shall be borne by the Company." Over the years, the defendant had paid the plaintiff's salaries tax on his behalf.

4. On 30 September 1991, the defendant adopted a share option scheme under which the directors might, at their discretion, invite any employee or executive director of the defendant to take up options to subscribe for its shares. It should be noted that the scheme was in place well before the plaintiff became a director of the defendant. On 11 September 1996, a total of 48.7 million shares under the options were granted to the defendant's directors including the plaintiff exercisable at a price of $0.76 per share subject to adjustment at any time from 11 October 1996 up to and including 10 October 1998. On 29 August 1997, the plaintiff exercised his right under the shares option and made a profit of $22,061,100. Tax payable out of the profit was assessed in the region of $3 million. The plaintiff considered that the defendant was obliged under Clause 6(G) of the employment agreement to pay such tax on his behalf. But the defendant refused to settle the same. As at 30 March 2001, the plaintiff was liable to the Inland Revenue Department ("IRD") in the sum of $3,480,386.31, which included surcharges because of non-payment.

5. The plaintiff now claims for the said sum of $3,480,386.31, a declaration that the defendant is liable to indemnify the plaintiff all loss occasioned by its breach of the employment agreement and damages.

The plaintiff's case

6. In his affirmations filed in support of this application, the plaintiff alluded to the facts as outlined above, exhibited the relevant documentary evidence and explained how he was recruited by the defendant in greater details thus. The plaintiff had known the defendant's managing director and chief executive officer, Mr Cheng Chao Ming ("Mr Cheng") since 1989. Mr Cheng is also a Singaporean. He was the former chairman of the defendant. In about August 1993, the plaintiff came to Hong Kong upon Mr Cheng's request to take up employment as a project manager with one of Mr Cheng's companies, Jensen International Development Limited. However, since the construction project to be taken up by this company fell through, the plaintiff did not take up the job as planned. Mr Cheng then asked the plaintiff to stay in Hong Kong to assist him in the acquisition of the defendant, a listed company then known as Yiu Wing International Holdings Limited and the running of it thereafter. In order to persuade the plaintiff to stay, Mr Cheng offered him an attractive package including a decent salary and share option. Mr Cheng also promised that the money earned by the plaintiff would be tax-free. The defendant would pay all the tax on his behalf including those arising from the share option. Attracted by the package, the plaintiff later entered into the employment agreement with the defendant.

7. The plaintiff admitted that the share option was exercised only after he had left the employment but contended that the defendant's obligation to pay the tax under Clause 6(G) subsisted so long as the tax derived from his employment with the defendant.

8. After he had received the tax demand from the IRD, the plaintiff immediately asked the defendant to settle the tax but it did not do so. On 5 July 1999, after receiving a further tax demand with a 5% surcharge dated 28 June 1999, the plaintiff wrote to the defendant asking the defendant to settle the tax. Pursuant to the plaintiff's request, the defendant wrote to IRD on 23 June 2000. In this letter, the defendant stated that it was under the employment agreement responsible for the plaintiff's tax liability derived in Hong Kong. But due to funding arrangement, it applied to pay the tax by six months' instalments commencing on 31 July 2000. The application was refused by IRD on 23 August 2000.

9. The plaintiff also relied on the affirmation of one of the former directors of the defendant, Mr Samuel Cheung Wing Keung. Mr Cheung said he was granted the share option and did exercise his right thereunder. However, he personally paid the tax on the profit derived from the exercise of the option because his employment agreement with the defendant did not contain a provision similar to Clause 6(G), as can be seen from a copy of his employment contract exhibited. Mr Cheung confirmed that he was the director referred to in the affirmation of Mr Wong Yim Wah filed on behalf of the defendant on 14 May 2001 in opposition who had exercised the share option and paid his own tax arising therefrom. Lastly, he said that the defendant would pay all local tax for the plaintiff was not a usual package offered to its employees or officers.

The defendant's case

10. Mr Wong Yim Wah is the defendant's financial controller. He deposed that it was never agreed by the parties, expressly or impliedly, nor was there any intention on the defendant's part, that should a director exercise his share option and make a profit, the defendant would pay the tax for the director. Referring to the letter by the defendant to IRD dated 23 June 2000, Mr Wong said that it was written upon the request of the plaintiff who wanted to make payment of the tax by instalments and thought that he would have a better chance of success if the application was made by the defendant on his behalf. The defendant acceded to such a request in an attempt to help a former director. It was never an acknowledgement to either the plaintiff or IRD that the defendant was responsible for the tax. While admitting that he did ask the defendant to write to IRD, the plaintiff denied that he had made the request as alleged by Mr Wong.

11. Mr Chan for the defendant submitted that Mr Cheng might not have acted with the authority to offer the remuneration package to the plaintiff. There was no board resolution confirming that the defendant had agreed to make the offer. Mr Chan also submitted that share option was not mentioned at all in the employment agreement. If indeed there was such an offer to pay the tax arising from the exercise of the share option, the same should have been mentioned in the agreement.

12. At the end of his submission, Mr Chan applied for an adjournment to enable further instructions to be taken from Mr Cheng, who was then outside Hong Kong. He said Mr Cheng was the only person who could give evidence on the full picture. The application was opposed.

13. Having heard the parties, I refused the application. Given his involvement, instructions no doubt should be taken from Mr Cheng. But no explanation was given why instructions were not taken from Mr Cheng by the solicitors who formerly handled the matter for the defendant. And it would be singularly inappropriate to allow the defendant to file further evidence after full submissions had been made.

14. I now turn to consider if the defendant has shown on the evidence before me any arguable defence.

Arguable defence shown?

15. In my view, whether the defendant is liable to pay the tax arising from the plaintiff's exercise of the share option after he had left employment depends on the effect of Clause 6(G). It is clearly the intention of the parties that all the local tax to be borne by the defendant thereunder must derive from the remuneration received by the plaintiff in his capacity as a director.

16. It is true that the employment agreement itself did not set out any provision for the share option. However, the plaintiff's evidence is that the share option was part and parcel of the remuneration package and that Mr Cheng had promised to pay the tax arising from the exercise of the share option. As noted, the defendant's scheme of inviting directors to take up share options was already in place when the plaintiff was offered the directorship. It is therefore not surprising that Mr Cheng did make the offer to the plaintiff in order to persuade him to work for the defendant. The defendant had adduced no evidence to contradict the plaintiff except the bare denial of Mr Wong. Mr Payne for the plaintiff submitted that Mr Wong is not in a position to deal with the plaintiff's evidence because he did not have the necessary personal knowledge, given the unchallenged evidence of the plaintiff that all along it was Mr Cheng who dealt with his employment matters and that Mr Wong did not join the defendant until after the plaintiff had left employment. He also complained that Mr Wong had failed to identify the source of information to support his denial that the defendant had agreed to pay the tax. With respect, I agree. Mr Cheng's evidence would be crucial to support the defendant's case. In the absence of such evidence and any credible explanation why that is so, I will prefer and accept the plaintiff's evidence.

17. Mr Chan for the defendant submitted that Mr Cheng might not have the requisite authority to deal with the matters relating to the plaintiff's employment in the way he did. But that was not borne out by Mr Wong's evidence or indeed any evidence at all. Mr Cheung's evidence that he as a director did not enjoy similar tax benefit is likewise not contradicted.

18. On the evidence before me, it is my view that the parties clearly intended that under Clause 6(G) the defendant would pay the tax arising from the plaintiff's exercise of the share option as part and parcel of the remuneration package. It matters not whether the option was exercised after the plaintiff had left employment. It remained part of the remuneration he received in the capacity as a director of the defendant.

19. The defendant's own letter to IRD dated 23 June 2000 flatly contradicted the defendant's case. This letter is of course inadmissible as an aid of construction of Clause 6(G). However, it is a clear admission that the defendant was liable under the employment agreement to pay the tax. Mr Chan prayed in aid the submission that this letter might not have been issued with the authority of the defendant. But Mr Wong did not say so in his affirmation. Instead, he tried to explain why the letter was issued. I do not find his explanation believable. It is against the weight of evidence. It had all along been the plaintiff's stance that the defendant should pay the tax. In his letter to the defendant dated 5 July 1999, he did ask the defendant to settle the tax on his behalf. It is also contrary to common sense. There was no reason why the defendant had to represent to IRD that it was liable under the agreement to pay the tax on the plaintiff's behalf.

Conclusion

20. For the foregoing reasons, I am not satisfied that the defendant has raised any arguable defence to the plaintiff's claim. On the form of relief, absent any payment by the plaintiff to IRD to satisfy the tax, I think he is only entitled to a declaration that the defendant is liable to indemnify the plaintiff for all the loss and damage occasioned by the defendant's breach of Clause 6(G) of the employment agreement and damages to be assessed. This is the judgment that I will enter in his favour.

21. Costs should follow the event. I do not see any reason to the contrary. Accordingly, I will make an order nisi that costs of this application be to the plaintiff to be taxed if not agreed. The order nisi is to be made absolute within 14 days after handing down of this judgment.