ICBC INTERNATIONAL WEALTH INVESTMENT LTD v. ROLLCASH INVESTMENTS LTD

HCA 892/2017

[2023] HKCFI 2585

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 892 OF 2017

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BETWEEN

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JUDGMENT

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INTRODUCTION

1.  This is the trial of the action by ICBC International Wealth Investment Ltd as the Plaintiff for indemnification from Rollcash Investments Ltd as the Defendant of profits tax liability of HK$28,860,875 together with its expenses and losses under a tax indemnity deed (“Deed”) executed by the Defendant in relation to a restructuring exercise which followed a pre-IPO investment by the Plaintiff.

2.  Both parties agree that the dispute is essentially one of construction of the terms of the Deed. Despite a total of 5 witnesses being called by the parties to testify at trial, much of the material facts which are pertinent to the resolution of the dispute are in fact undisputed.

UNDISPUTED FACTS

3.  The Plaintiff is a BVI company set up as a joint venture between ICBC International Finance Ltd (“ICBCIF”) and the Defendant to invest in the shares of UMS (as defined below).

4.  ICBCIF is an indirect wholly-owned subsidiary of ICBC International Holdings Limited (“ICBC Holdings”), a company within the ICBC group.

5.  The Defendant is a BVI company. It is a subsidiary and corporate vehicle of Liang Tong International Investment Group Limited (“Liang Tong”).

6.  From 16 December 2014 to 9 November 2015, ICBCIF and the Defendant held 51% and 49% of the issued shares in the Plaintiff respectively.

7.  On 22 December 2014, the Plaintiff acquired a stake in the shares of a private company, Universal International Leasing Co. Ltd which was financed by shareholders’ loans totalling about HK$380M provided by ICBCIF and the Defendant in the same ratio as their shareholdings in the Plaintiff.

8.  The Defendant’s shareholders’ loan to the Plaintiff in the sum of RMB146,983,095 (or about HK$186M being 49% of HK$380M) (“Defendant’s Shareholders’ Loan”) was also partly funded by a loan from ICBCIF to the Defendant of US$8,173,407, equivalent to about HK$63.5M or RMB50M (“RMB50M Loan”).

9.  As security for the RMB50M Loan, the Defendant pledged its 49 shares in the Plaintiff (“Share Pledge”) and assigned its shareholder’s loan (“Loan Assignment”) in favour of ICBCIF.

10.  In June 2015, Universal International Leasing Co. Ltd was renamed Universal Medical Financial & Technical Advisory Services Company Ltd (“UMS”).

11.  On 8 July 2015, UMS was listed on the Hong Kong Stock Exchange (Stock Code: 2666) after a successful IPO and the Plaintiff’s original stake in UMS was translated to 121,243,560 shares in UMS (“UMS Shares”) following the exercise of an over-allotment option. By reference to its initial investment cost of HK$380M, this translated to about HK$3.14 per share.

12.  The position as at 8 July 2015 may be illustrated as follows:

13.  The Plaintiff’s investment in the UMS Shares was subject to a lock-up undertaking dated 15 June 2015 (“Lock-Up Undertaking”) whereby the Plaintiff, ICBCIF and the Defendant undertook not to dispose of or cause any encumbrance upon the UMS Shares within 6 months after the listing of UMS (ie by 8 January 2016) unless the transfer of such shares by the Plaintiff was to ICBCIF or the Defendant, in which case ICBCIF or the Defendant (as the case may be) would be subject to the Lock-Up Undertaking for the same period.

14.  In November 2015, the Plaintiff underwent a restructuring exercise (“Exercise”) in order to allow the Defendant to directly hold the UMS shares. As part of this restructuring:

a. The Plaintiff would repay the Defendant’s Shareholders’ Loan.

b. The Plaintiff would repurchase from the Defendant all of the Defendant’s 49 shares in the Plaintiff (“Repurchase”) which it would then cancel.

c. In exchange, the Plaintiff would transfer 59,409,344 shares in UMS, approximately 49% of the shares in UMS held by the Plaintiff, to the Defendant.

15.  On 9 November 2015, the Exercise was carried out, resulting in the following structure:

16.  On 9 November 2015, the trading price of UMS shares was HK$6.09 per share.

17.  As part of the Exercise, the following also occurred on or around 9 November 2015:

a. The Defendant repaid the RMB50M Loan to ICBCIF.

b. ICBCIF released the Share Pledge and the Loan Assignment.

c. The Defendant executed and delivered the Deed in favour of the Plaintiff and ICBCIF.

18.  In December 2015, the Plaintiff instructed its tax advisor PwC to advise on the Plaintiff’s potential tax liability arising out of the Exercise. In a letter dated 22 December 2015, PwC advised the Plaintiff that the acquisition and disposal of the UMS shares by the Plaintiff was likely to be treated as trading in securities and revenue in nature and that the Plaintiff had delivered a gain of around HK$176M from the transfer of the 59,409,344 UMS shares to the Defendant based on the trading price of HK$6.09 per share. As such, the tax payable for the assessment year of 2015/16 was anticipated to be around HK$28.9M.

19.  In January and February 2017, the Plaintiff’s liability to pay profits tax for the 2015/16 year as a result of the Exercise was assessed by the Inland Revenue Department (“IRD”) at HK$28,860,875 (“Tax Liability”) and was due to be paid by 9 March 2017, as evidenced by the following assessments/notices by the IRD (collectively “Notices of Assessment”):

a. Notice of Assessment dated 23 January 2017.

b. Revised Notice of Assessment dated 8 February 2017.

c. Notice dated 17 February 2017 specifying the due date for tax payment to be made by the Plaintiff.

20.  From 15 February 2017 to March 2017, the Plaintiff made repeated demands, formally and informally, for the Defendant to indemnify it against its Tax Liability pursuant to the Deed. The Plaintiff also issued formal demands to the Defendant attaching the Notices of Assessment in support.

21.  On 8 March 2017 (one day before the deadline), the Plaintiff paid the Tax Liability in full to comply with the IRD’s demand.

22.  On 12 April 2017, the Plaintiff commenced these proceedings to recover the Tax Liability from the Defendant in accordance with the Deed.

23.  On the same day, the Plaintiff obtained a Mareva injunction order (“Injunction Order”) against the Defendant up to the amount of the Tax Liability.

24.  On 13 April 2017, the Defendant paid the sum of HK$28,860,875 into Court as security under the Injunction Order.

25.  On 19 April 2017, Mimmie Chan J ordered that upon the Defendant having paid the sum of HK$28,860,875 into Court as security, the Injunction Order would be discharged, and that the payment shall not be paid out except pursuant to a further order or with both parties’ written consent.

THE PLAINTIFF’S CASE

26.  In this action, the Plaintiff seeks indemnification of the Tax Liability incurred pursuant to the terms of the Deed.

27.  In particular, Clauses 4.1 – 4.3 of the Deed provide as follows:

“4.1 In consideration for [the Plaintiff] and [ICBCIF] agreeing to undertake the Exercise, [the Defendant] hereby agrees to indemnify [the Plaintiff] and/or [ICBCIF] (the “Indemnified Parties”), and hold them harmless from and against all liabilities, costs, expenses, damages and losses (including but not limited to any legal costs (calculated on a full indemnity basis) and all other professional costs and expenses) suffered or incurred by the Indemnified Parties in respect of any Taxes for which they are liable to pay any Tax Authority as a result of the consummation of the Exercise as well as any loss, cost, damage or expense, including reasonable attorneys’ fees and costs, that is attributable to or results from, the failure of [the Defendant] to pay under this tax indemnity deed. For the avoidance of doubt, the indemnity provided by [the Defendant] in this Clause 4.1 will not apply to any Tax liability arising from any distribution or transfer (whether prior to or after the date of this deed) by [the Plaintiff] in respect of the 61,834,216 UMS shares, representing approximately 51% of UMS shares that it holds.

4.2 For the purposes of Clause 4.1:

(A) ‘Tax’ includes any charges, fees, levies, imposts, duties, or other assessments of a similar nature, including income, profits, estimated, excise, sales, transfer, stamp, windfall profits, withholding, ad valorem, estimated, or other tax or governmental fee of any kind whatsoever, imposed or required to be withheld by any Tax Authority including any interest, additions to tax, or penalties applicable or related thereto; and

(B) ‘Tax Authority’ means any governmental authority or any subdivision, agency, commission or authority thereof or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or imposition of any Tax.

4.3 Payment by [the Defendant] in respect of any liabilities in relation to Tax under this tax indemnity deed must be made on demand, in cleared and immediately available funds, within seven business days after the date on which the Indemnified Parties serve notice along with any tax supporting documents furnished by the relevant Tax Authority on [the Defendant] requesting payment.” (underlining emphasis added)

28.  There is no dispute that:

a. Profits tax payable under the Inland Revenue Ordinance (Cap 112) (“IRO”) falls within the meaning of “Taxes” under Clause 4.2(A) of the Deed.

b. The IRD is a “Tax Authority” under Clause 4.2(B) of the Deed.

c. The Tax Liability accrued as soon as the Notices of Assessment were served on the Plaintiff, whereupon the Plaintiff became liable to pay to the IRD the tax demanded by the date shown unless there is a hold-over: ss71(1), 71(2), 75(2) and 75(4) of the IRO.

29.  In the circumstances, the key issue of construction in the present action is whether the Tax Liability arose “as a result of the consummation of the Exercise”.

30.  Mr Man SC, Counsel for the Plaintiff, submits that the answer to the above question must be “yes”. By reason of the Exercise, the Plaintiff had realised profits by transferring the relevant UMS shares to the Defendant. The Plaintiff filed its tax returns and tax computations with diligence upon professional advice. The realised profits were reflected in the financial statements for the year ended 31 December 2015 prepared by KMPG (the Plaintiff’s auditor). PwC further independently advised the Plaintiff that the Exercise was likely to be subject to profits tax.

31.  By Clause 4.3 of the Deed, the Defendant was liable to pay the sum of HK$28,860,875 within seven business days of demand. As the Plaintiff served its formal written notice to the Defendant on 16 February 2017, the sum was therefore due and payable to the Plaintiff by 27 February 2017 at the latest.

32.  Even if there were potential grounds for challenging the tax assessment (which is denied by the Plaintiff), a taxpayer’s liability to pay the tax demanded is unaffected unless the Commissioner of Inland Revenue exercises the power to hold-over. In the present case, the Plaintiff would have to pay tax to the IRD, and the Defendant should indemnify the Plaintiff for so doing. The challenge could then be pursued on the basis that both the IRD and the Plaintiff are paid. However, this has not happened.

33.  Accordingly, the Plaintiff contends in this action that it is entitled to recover the Tax Liability from the Defendant pursuant to the terms of the Deed.

THE DEFENDANT’S CASE

34.  In a nutshell, the Defendant’s case is that it is not liable to indemnify the Plaintiff for the Tax Liability on the basis that the Exercise did not on true analysis attract profits tax, and consequently that the Tax Liability did not fall within the meaning of “Tax” under the Deed.

35.  In this regard, the Defendant contends that the Deed was subject to and/or contained the following implied terms by reason of necessity and/or business efficacy and/or as a matter of law (“Implied Terms”):

a. The Deed did not cover any tax demanded or levied by any Tax Authority which had no factual or legal basis.

b. The Deed does not cover any tax demanded or levied by any Tax Authority due to factually or legally erroneous tax returns filed by the Plaintiff.

c. The Deed does not cover any tax demanded or levied by any Tax Authority which the Plaintiff could have successfully avoided by lodging the necessary objections or applications.

36.  The Defendant further contends that the Plaintiff is not liable to pay profits tax as a result of the Exercise on the following grounds:

a. The Plaintiff was not engaging in any trade or business within the meaning of the IRO.

b. The Plaintiff did not realise any profits that were revenue in nature.

c. The Exercise was a transaction between an entity and its shareholder in the nature of a return of capital.

d. The Defendant intended its investment in the UMS Shares to be a long term investment.

37.  The Defendant has also pleaded in its Amended Defence that the Plaintiff had the obligation to act fairly and not irrationally in seeking to exercise its rights against the Defendant under the Deed and that the Plaintiff’s withdrawal of an objection and/or its failure to lodge and pursue an assessment correction application under s70A of the IRO were unreasonable in the circumstances.

38.  Further, in its written opening submissions, the Defendant contends that the Tax Liability was the result of the Plaintiff’s error (ie an erroneous profits tax return filed by the Plaintiff) rather than the “consummation of the Exercise”. As such, the Defendant is not liable to indemnify the Plaintiff under the Deed.

WITNESSES

39.  As far as witnesses are concerned, the Plaintiff called Ms Fong Wai Ching (“Ms Fong”) as its only witness. She has been a Managing Director of ICBC Holdings since 2014. She was not personally involved in the underlying transactions. Her role as a witness was primarily to present the documentary evidence and to offer her views on the practice of ICBC Holdings based on her experience and discussions with her colleagues from the finance and legal teams. She gave evidence in a straightforward manner and was unshaken in cross-examination. I find her to be an honest and reliable witness.

40.  The Defendant called 4 witnesses in total, namely, Mr Zhang Xiao Sui (“Mr Zhang”), Mr Ling Guo Wei (“Mr Ling”), Mr Mu Yi (“Mr Mu”) and Ms Li Ji Hong (“Ms Li”).

41.  Mr Zhang is an executive director of the Defendant. He is an experienced businessman who has been working in various fields since the 1970’s. He gave an account of the cooperation between Liang Tong/Defendant and UMS, the long term nature of the investment in UMS, the background and structure of the cooperation between the Defendant and the ICBC group, how Mr Su Guang (the former Head of the Cross Border Structured Finance Department of ICBC Holdings and a former director of ICBCIF) (“Mr Su”) requested the Defendant to carry out the Exercise and to sign the Deed, and the reasons why the Defendant started to sell its UMS shares in the second half of 2016 and after the commencement of the winding up proceedings in the BVI by the Plaintiff against the Defendant in March 2017 (“BVI Proceedings”).

42.  In giving his testimony, Mr Zhang was often evasive and was prepared to tailor his evidence to suit the Defendant’s case.

43.  For example, under cross-examination, Mr Zhang was presented with certain WeChat messages he exchanged with Mr Xu Kuang (“Mr Xu”) of ICBC Holdings in February/March 2017 which show that Mr Xu repeatedly requested for the payment of the Tax Liability and that Mr Zhang explained that the failure to make payment was possibly due to the lack of funds (“可能是没钱了”) as they were even unable to pay wages (“最近工资都发不出了”) and that Liang Tong no longer had any business (“量通已没业务了”). However, Mr Zhang testified that he had no recollection of Mr Xu, that he met over 100-200 ICBC employees over the years and that he suspected that the WeChat records were forged. He claimed that he could not verify them against the numerous WeChat messages after so many years, even though they were adduced by the Plaintiff in the BVI Proceedings on 16 March 2017, being only a few weeks after the exchanges took place. In the end, Mr Zhang accepted that he never checked his own WeChat records and blamed the Defendant’s former solicitors for failing to draw them to his attention.

44.  Mr Ling was at all material times the chief financial officer of the Defendant. He is a mid-level accountant qualified in the PRC. He gave an account of the negotiations between himself and other staff of the ICBC group or the Plaintiff regarding matters concerning the Exercise, the Deed as well as the subsequent tax demand and the Plaintiff’s request for indemnification.

45.  Like Mr Zhang, I do not find Mr Ling to be an impressive or reliable witness.

46.  For example, Mr Ling’s evidence about the reason for the Defendant eventually disposing of the UMS shares was constantly evolving. In his witness statement, he said that the Defendant only sold part of the UMS shares in around October 2016 due to foreign exchange losses sustained by Liang Tong and its subsidiaries. Under cross-examination, Mr Ling claimed that the main reason for the disposal was to manage the litigation risk posed by the BVI and Hong Kong proceedings. In re-examination, Mr Ling provided yet another reason, namely that the sale of the UMS shares in July 2016 onwards was to settle interest payments to First Shanghai Securities Ltd (“First Shanghai”), the Defendant’s securities broker.

47.  Mr Mu and Ms Li were at all material times shareholders of the Defendant. In addition, Mr Mu was a director of the Defendant and Ms Li was the Defendant’s representative on the Plaintiff’s board of directors, although she had no active role in the Plaintiff’s business. Apart from signing some transactional/corporate documents or resolutions, they had limited involvement in the underlying transactions in question. Their evidence are of limited relevance to the issues in dispute in the present action.

48.  Overall, as the present dispute is essentially one of construction of the terms of the Deed and that the material facts pertinent to this exercise are largely undisputed, the testimonies of the witnesses called are of limited significance. However, to the extent that there is any conflict in witness evidence between the parties which is relevant to the resolution of the dispute, I would prefer the Plaintiff’s to the Defendant’s for the reasons mentioned above and also in the course of this judgment below.

PROPER CONSTRUCTION OF THE DEED

Language, Context and Purpose of the Deed

49.  The key issue of construction which divided the parties at trial is whether the Tax Liability arose “as a result of the consummation of the Exercise”.

50.  The relevant principles on contractual interpretation are well-established. As expounded by Ribeiro PJ and Lord Collins in Eminent Investments (Asia Pacific) Ltd v DIO Corp (2020) 23 HKCFAR 487 at §§43 to 44:

“43. It is a truism that the starting point is the ordinary and natural meaning of the words of the contract, and of course in the vast majority of cases that is the ending point also. But, as Ma CJ pointed out in Fully Profit (Asia) Ltd v Secretary for Justice, in the more difficult cases it is not particularly helpful to refer to the “ordinary and natural meaning” of words because in such cases there can be much debate over exactly what is the ordinary or natural meaning of words; and in those cases the surer guide to interpretation is context.

44. In Wood v Capita Insurance Services Ltd, Lord Hodge JSC reviewed the many cases on interpretation and emphasised that interpretation was a unitary exercise. That is why, where there are conflicting interpretations, account should be taken of the natural and ordinary meaning of the provision in question, the purpose of the contract and of the provision, other relevant provisions, the facts and circumstances known or assumed by the parties at the time that the contract was executed, the quality of the drafting of the instrument, and commercial common sense.”

51.  Mr Cheung, Counsel for the Defendant, urged me to bear in mind for the purpose of this case the commercial consequences of the rival interpretations between the parties and consider which one is more consistent with business common sense. Whilst I will not lose sight of commercial sense in construing the Deed, it is trite that commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be considered. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly for one of the parties, is not a reason for departing from the natural language. See Eminent Investments at §45(e).

52.  Further, in conducting an interpretation exercise:

a. The Court must be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest. Likewise, the Court must not lose sight of the possibility that a provision may be a negotiated compromise: Eminent Investments at §45(b).

b. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals, whereas the correct interpretation of contracts which are marked by informality, brevity or the absence of skilled professional assistance may be achieved by a greater emphasis on the factual matrix: Eminent Investments at §45(c).

53.  In the present case, it is important to note at the outset that the express wordings of Clause 4.1 of the Deed do not require the Court to investigate whether the consummation of the Exercise is “the legal cause” of the relevant liability, or whether there is any novus actus interveniens. The clause simply requires the Court to answer the question of whether the Tax Liability is “a result” of the consummation of the Exercise.

54.  Further, I agree with the Plaintiff that it is irrelevant to consider what would have happened if there had been negligence or bad faith on the part of the Plaintiff, or what would have happened if the Defendant had paid the tax first and then insisted on the Plaintiff pursuing an objection. These are not the present facts. Indeed, Mr Cheung reiterated a number of times throughout the trial that the Defendant does not charge the Plaintiff with any allegation of negligence or bad faith in the preparation and filing of its tax returns and which led to the IRD’s assessment of the Tax Liability.

55.  In my judgment, the Tax Liability clearly arose as a result of the consummation of the Exercise. It was because of the Exercise that the Plaintiff had realised its profits in transferring the UMS shares to the Defendant. Upon professional advice confirming its liability to pay profits tax, the Plaintiff filed its tax returns and the Tax Liability was accordingly assessed by the IRD.

56.  Given the plain and clear express wordings of the Deed and the fact that both the Plaintiff and the Defendant were sophisticated commercial parties who engaged professional advisers in drafting the Deed, there is little room to construe those wordings differently than as outlined above.

57.  To the extent that it is necessary to resort to the context and purpose of the Deed, I also find that this is consistent with the Plaintiff’s interpretation of the Deed.

58.  As expressly recorded in Clause 4.1 of the Deed, the indemnity was provided by the Defendant in consideration for the Plaintiff and ICBCIF agreeing to undertake the Exercise. In this regard:

a. The Plaintiff’s case is that the Defendant requested a restructuring exercise so that the Defendant could directly hold the UMS shares which could then be used to obtain cheaper financing than those under the RMB50M Loan.

b. On the Defendant’s case (primarily corroborated by Mr Zhang’s evidence), Mr Su orally requested the Exercise and the early repayment of the RMB50M Loan as he was leaving ICBC and that he needed to terminate this deal reached with the Defendant before he could pass an alleged internal exit audit.

c. However, the Defendant’s case is contradicted by various contemporaneous documentation, including, inter alia:

i. An e-mail from Mr Leon Peng of ICBCIF to Mr Ling in which the Defendant was asked to submit a formal written application for the Exercise, and the Defendant never indicated in return that it was the Plaintiff which requested the Exercise.

ii. An ICBC group’s internal document prepared in around October 2015 which recorded that the Defendant requested the Exercise so as to obtain cheaper financing elsewhere (“Rollcash提出，由于其在第三方能够拿到更便宜的融资，希望提前还款并拿回通过ICBCI Wealth持有的3.46%环球医疗股份，由其自行处理”).

d. Further, I note that:

i. In the evidence filed by the Plaintiff in support of its BVI Proceedings, it was stated that the Defendant requested the Exercise. This was not challenged by Mr Ling in his affirmation in opposition filed on behalf of the Defendant.

ii. Ms Fong confirmed in her testimony that there was no procedure or requirement for a staff like Mr Su (who was not a secondee) to go through an exit audit upon his departure.

iii. Immediately upon the carrying out of the Exercise, the Defendant obtained cheaper financing from First Shanghai. Further, two days after the Exercise, the Defendant drew down fresh loans from First Shanghai in the total sum of RMB56M.

e. In light of the above, I accept the Plaintiff’s case that it was the Defendant who requested the Exercise for the purpose of obtaining cheaper financing.

59.  In any event, on either side’s case, the Exercise was not conducted for the Plaintiff’s purposes or at its request. In the circumstances, the parties could not be taken to have agreed for the Defendant to provide a limited indemnity whereby in the case of an erroneous assessment by the IRD through no fault (negligence or bad faith) of the Plaintiff the latter would have to pay the tax first and bear all the expenses of objecting to the erroneous assessment. It seems to me that such an interpretation, as advocated by the Defendant, would be contrary to the very purpose of an indemnity in the first place, which is to hold the Plaintiff harmless of tax liability.

The Defendant’s Case on Legal Causation

60.  As mentioned in paragraph 38 above, the Defendant contends that the Tax Liability was the result of the Plaintiff’s error. Analysed from a legal causation point of view, the Tax Liability could not therefore have arisen as a result of the consummation of the Exercise.

61.  With respect, I do not find any merit in this contention.

62.  First, the Defendant’s construction is not a viable one based on the express wordings of the Deed.

63.  Clause 4.1 is engaged if the Tax Liability is a result of the consummation of the Exercise. It is irrelevant that there may be other causes of the Tax Liability. The phrase “as a result of” only requires the relevant cause to be a cause rather than the sole cause.

64.  Mr Cheung submits that the consummation of the Exercise must be a “proximate cause” of the Tax Liability before the Defendant would be liable to indemnify the Plaintiff under the Deed. Borrowing the concept from insurance cases (eg Lloyds TSB General Insurance Holdings Ltd & Ors v Lloyds Bank Group Insurance Co Ltd [2002] CLC 287 at §42 per Potter LJ; [2004] 1 CLC 116 at §45 per Lord Hobhouse), he submits that in interpreting the words “as a result of” in Clause 4.1 of the Deed, the consummation of the Exercise must be the dominant, effective or operative cause of the Tax Liability.

65.  I do not derive much assistance from the insurance cases cited by Mr Cheung. The concept of proximate cause is heavily featured in those cases since only loss “proximately caused” by an insured peril is recoverable under a contract of insurance. As such, it has been held in the insurance law context that in deciding whether the loss is proximately caused by an insured peril or otherwise lies outside the scope of the insurance contract, the courts will seek to ascertain the “direct”, “dominant” and “operative and efficient” cause of the loss (see Chitty on Contracts, Hong Kong Specific Contracts, 7^th ed, §16-150). The Deed in the present case is evidently not an insurance contract. To apply the concept of “proximate cause” to the words “as a result of” in Clause 4.1 is to do violence to the clear language of the contractual term. Those clear words in Clause 4.1 only require the consummation of the Exercise to be a cause (and not necessarily the sole or proximate cause) of the Tax Liability.

66.  Second, the Defendant has never pleaded a case that the “legal cause” of the Tax Liability was the Plaintiff’s conduct in respect of its tax return. As legal causation is largely a question of fact, various factual inquiries could have been pursued by the Plaintiff. I agree with the Plaintiff that the Defendant should not be allowed to run this unpleaded case at trial.

67.  Third, it is well established at law that a claimant’s conduct would not constitute a novus actus interveniens unless it is wholly unreasonable and/or of such overwhelming impact that the conduct eclipses the defendant’s wrongdoing: Clerk and Lindsell on Torts (23^rd ed; 2020) at §2-129. Given that the Defendant does not charge the Plaintiff with negligence or bad faith, I do not see how on the facts of the present case any mistake on the Plaintiff’s part would be sufficient to sever the chain of causation.

The Canada Steamship principle

68.  The Defendant also contends that Clause 4.1 of the Deed should be construed in light of the principle laid down in Canada Steamship Lines Ltd v The King [1952] AC 192 (and the line of subsequent cases which have applied the same in the exemption clause context) such that absent clear and express language, an indemnity will usually not be construed in such a way to protect the party in whose favour it is given from the consequence of the latter’s own wrongful act.

69.  Relevantly in the present case, the Defendant submits that it cannot be right for the Plaintiff to seek to extend the Defendant’s indemnification obligations to cover the Tax Liability or any tax liability which arose as a result of the Plaintiff’s error.

70.  In Canada Steamship, it was held that unless clear language is used, parties would not be taken to have agreed to exempt the others from the consequences of their own negligence or to indemnify them against losses so caused.

71.  In Gillespie Brothers & Co Ltd v Roy Bowles Transport Ltd [1973] 1 QB 400, Buckley LJ referred to Canada Steamship and explained at p419C-D that the fundamental consideration in contracts which contain such exemption clauses is that it is inherently improbable that one party to the contract should intend to absolve the other party from the consequences of the latter’s negligence. Buckley LJ’s observations were in turn referred to by Viscount Dilhorne in Smith & Anr v South Wales Switchgear Co Ltd [1978] 1 WLR 165 at 168C-E who held, in the context of indemnity clauses, that it is even more inherently improbable that a contracting party would agree to compensate the other party for acts of negligence.

72.  In circumstances where the Defendant does not charge the Plaintiff with negligence or wrongful conduct in preparing its tax returns, the Canada Steamship principle is not applicable to the present case.

73.  Even assuming for argument’s sake that the Plaintiff has committed an innocent/faultless error in its tax returns, this type of error does not involve any negligence or actionable wrong and does not therefore engage the Canada Steamship principle.

The Defendant’s Alleged Implied Terms

74.  As regards the Defendant’s alternative case on construction based on implied terms, the legal principles on the implication of terms are well-established and the requirements were set out by the Court of Final Appeal in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 at §59 as follows:

a. It must be reasonable and equitable.

b. It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it.

c. It must be so obvious that “it goes without saying”.

d. It must be capable of clear expression.

e. It must not contradict any express term of the contract.

75.  These 5 requirements were commented upon by Lord Neuberger in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd & Anr [2016] AC 742 at 754F – 755C as follows:

a. The implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract but was concerned with what notional reasonable people, in the position of the parties at the time at which they were contracting, would have agreed.

b. A term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term.

c. It is questionable whether the first requirement of reasonableness and equitableness will usually, if ever, add anything. If a terms satisfies the other requirements, it is hard to think that it would not be reasonable and equitable.

d. Although the 5 requirements are otherwise cumulative, business necessity and obviousness can be alternatives in the sense that only one of them needs to be satisfied.

e. If one approaches the issue by reference to the officious bystander, it is vital to formulate the question to be posed by him with the utmost care.

f. Necessity for business efficacy involves value judgment. The test is not one of “absolute necessity”. It may well be that a more helpful way of putting the second requirement is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

76.  In the more recent decision of the Privy Council in Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2, Lord Hughes (with whom Lord Neuberger, Lord Clarke and Lord Carnwath agreed) summarised the law at §7 as follows:

“… It is enough to reiterate that the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated. A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, “Oh, of course”) and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same. The concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term is an essential but not a sufficient pre-condition for inclusion. And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement.”

77.  In the present case, I am of the view that none of the Implied Terms alleged by the Defendant satisfies the test of obviousness, necessity or business efficacy.

78.  As mentioned in paragraphs 58 to 59 above, the factual background and context of the Deed was that the Exercise was not carried out for the Plaintiff’s purposes or at its request but rather at the Defendant’s request.

79.  The effect of the Implied Terms is that even if the Plaintiff’s tax assessment is erroneous through no fault of its own, the Plaintiff would still have to pay the tax and the expenses of pursuing an objection. It seems to me that such a construction is unreasonable, non-obvious and inefficacious having regard to the background and context of the Deed as mentioned above.

80.  I therefore reject the Defendant’s case on this and find that the Implied Terms alleged by it do not form part of the terms of the Deed.

81.  Based on the above, the Plaintiff therefore succeeds in recovering the Tax Liability from the Defendant on the ground of construction of the Deed.

CORRECTNESS OF THE ASSESSMENT

82.  In light of my conclusion above, it is not strictly necessary for me to consider the question of whether the Tax Liability was correctly imposed by the IRD on the Plaintiff.

83.  However, since much time was spent on this issue at trial, I shall discuss this below, in the event that I am wrong on the conclusion reached above.

Was the Plaintiff carrying on a Trade or Business?

84.  Section 14(1) of the IRO provides as follows:

“Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part.”

85.  The following principles may be derived from the Court of Final Appeal decision in Lee Yee Shing v Commissioner of Inland Revenue (2008) 11 HKCFAR 6 at §§25, 68, 70, 71, 74:

a. The meaning of “trade” and “business” is different. Business is a wider concept than trade. The activity may be intermittent with long intervals of quiescence in between, and a business may exist even though the object of the activities is a loss. A profit making purpose is not conclusive of the question of whether the activities constitute a business.

b. In the context of trading in shares, share traders who buy and sell with the intention of re-selling for profits and who invariably hold for short periods (ordinarily for less than a year) are taxable when share trading is their business.

c. In this regard, a distinction between individuals and corporations is often drawn. In the case of a private individual it may well be that the mere receipt of rents from property that he owns raises no presumption that he is carrying on a business. In contrast, in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business.

86.  In the present case, the Plaintiff was established as a special purpose vehicle to carry out the pre-IPO investment in the UMS Shares to generate profits. The acquisition and realisation of the UMS Shares was the gainful use to which the Plaintiff put its assets. These assets were held for a relatively short period of time: the Exercise resulted in the disposal of 49% of the UMS Shares less than a year after their acquisition, and the Plaintiff ultimately realised all of the UMS Shares it retained after the Exercise by 46 trades in the open market less than 17 months after the expiry of the Lock-Up Undertaking.

87.  In light of the above, it seems to me that the Plaintiff’s contention that it was carrying on a business in acquiring and realising the UMS Shares is rather persuasive.

88.  The Defendant however contends that there was no trade or carrying on a business for a number of reasons.

89.  First, the Defendant submits that the focus of this Court should be on the Exercise only, which was a one-off incident. It stresses that the Plaintiff was not carrying on a trade or business in respect of the Exercise since the Plaintiff’s transfer of the UMS Shares to the Defendant was a distribution as opposed to a sale. In support of its factual case on distribution, the Defendant has referred me to various parts of the documentary evidence in which the transfer of the UMS shares to the Defendant as part of the Exercise was labelled as a distribution.

90.  However, I agree with the Plaintiff that on the basis that the transfer was in the course of carrying on its business as discussed in paragraphs 86 to 87 above and that it thereby realised profits by way of revenue (as discussed below), such profits are taxable under s14(1) of the IRO, and it is irrelevant whether the sale could be characterised as a distribution.

91.  In any event, there can be no distribution at law unless there is a discrepancy between the value provided to the company by the shareholder and the greater value provided to the shareholder by the company: Gower’s Principles of Modern Company Law (10^th ed; 2016) at §12-10. As such, irrespective of the “distribution” labels ascribed by the parties to the transfer of the UMS shares to the Defendant as part of the Exercise, the said transfer could not amount to a distribution because the value received by the Plaintiff in the Exercise was identical to the value it gave away (see discussions in §§109 to 112 below).

92.  For the sake of completeness, I should mention that the Defendant relies upon the Plaintiff’s shareholders’ resolution dated 16 December 2014 as part of the documentary evidence which suggests that the Plaintiff’s intention was to re-distribute the UMS shares back to the Defendant and ICBCIF in due course after the expiry of the relevant lock-up period. However, the resolution only provided that the Plaintiff “could” (“即可”) distribute the shares to the Defendant. There was no mandatory obligation on the part of the Plaintiff to so redistribute the UMS shares back to the Defendant. I therefore do not derive much assistance from this document in the context of the present analysis.

93.  Second, the Defendant emphasises that even prior to the Exercise, the Defendant had been a beneficial owner of the UMS Shares. The Defendant points to various internal documents within the ICBC group which preceded the Exercise (especially a document entitled “环球项目股份拆分” which described ICBCIF and the Defendant as indirectly holding (“间接持有”) 3.6% and 3.46% UMS shares) and submits that the Defendant must have an equitable right to 59,409,344 UMS shares held by the Plaintiff. In circumstances where two parties enter into a joint venture arrangement whereby it is contemplated that one of them will acquire property and that, if he does so, the other will obtain an interest in the property, a Pallant v Morgan equity will arise and the property will be held on constructive trust in accordance with the pre-acquisition arrangement. The Defendant submits that the joint acquisition of UMS Shares through the Plaintiff is a classic case giving rise to the Pallant v Morgan equity.

94.  However, the Defendant has not pleaded a case of Pallant v Morgan equity. Such an equity has been described in Lewin on Trusts (20^th ed; 2018) at §10-091 as follows:

“Where two parties enter into a joint venture arrangement whereby it is contemplated that one of them will acquire property and that, if he does so, the other will obtain an interest in the property, and pursuant to the arrangement the property is acquired, whether by the acquiring party himself or by a company owned by him, then the acquiring party may hold the property on constructive trust in accordance with the bargain under what is sometimes referred to as a “Pallant v Morgan equity”… Accordingly, consistent with an analysis founded on a constructive trust, the circumstances must be such as to make it inequitable for the acquiring party to retain the property for himself in a manner inconsistent with the arrangement on which the non-acquiring party has acted…”

95.  In the present case, there is no plea by the Defendant of the essential elements of such an equity, such as any contemplation between the parties that the Plaintiff would acquire the UMS Shares and that the Defendant would obtain an interest therein and that it is inequitable for the Plaintiff to retain the property in a way which is inconsistent with the arrangement reached between the parties.

96.  In fact, on the whole, the evidence before me tends to suggest that the Defendant’s understanding was that the Plaintiff should be the beneficial owner of the UMS Shares:

a. The Defendant advanced the Defendant’s Shareholders’ Loan to the Plaintiff to enable the latter to purchase the UMS Shares. Further, by clause 3.1(a) of the Loan Assignment deed dated 16 December 2014, the Defendant warranted that it was the beneficial owner of the loan(s) it provided to the Plaintiff. These matters tend to suggest that the Defendant’s intention was to be repaid the Defendant’s Shareholders’ Loan, rather than to acquire any beneficial interest in the UMS Shares.

b. The Share Pledge deed dated 16 December 2014 states that the pledge provided by the Defendant was in respect of its shares in the Plaintiff rather than the UMS shares (see Clauses 1.1 and 2.1 in particular). This also suggests that the beneficial ownership of such shares was vested in the Plaintiff.

c. The Defendant has relied on the Memorandum of Understanding entered into between ICBCIF and Liang Tong on 12 September 2014 (whereby ICBCIF was to acquire UMS shares and to in turn sell such shares to Liang Tong) and the Framework Agreement entered into between the Plaintiff and the Defendant on 17 October 2014 (whereby the Plaintiff shall acquire 17.5% UMS shares and then sell around 4.78% UMS shares to the Defendant) as suggesting that the intention of the Defendant was to acquire the UMS shares in its own name. I do not see how these agreements would assist the Defendant when they have been superseded by the agreements subsequently entered into between the parties as referred to above and which resulted in a very different structure for the investment in the UMS Shares.

97.  Third, the Defendant points to the fact that the UMS Shares were booked as the Plaintiff’s “available-for-sale investments” rather than trading stocks in its 2014 financial statements. However, as stated in the accompanying note of the Plaintiff’s 2015 financial statements, the Exercise resulted in the Plaintiff “derecognising the relevant available-for-sale investments” and reclassifying the relevant accumulated gain. These financial statements were audited by KPMG who booked the profits and corresponding tax liability in the said financial statements.

98.  Fourth, the Defendant has also asked me to bear in mind that Ms Fong confirmed under cross-examination that the Plaintiff had not considered making a profit in the Exercise but that the discussions between the parties concerned how to transfer the UMS shares back to the Defendant. Be that as it may, I do not regard this subjective intention of the Plaintiff as determinative of the question, especially in view of the objective evidence before me which suggest that the Plaintiff was carrying on a business.

99.  Fifth, the Defendant and its witnesses repeatedly emphasised during the trial that it intended its investments in the UMS Shares to be on a long term basis. In this regard, Mr Zhang gave detailed evidence on the types of co-operation between the Defendant/Liang Tong and UMS for the purpose of creating synergies between the two parties since they had similar businesses and interests.

100.  However, this is of limited assistance to answering the question of whether the Plaintiff was liable for profits tax as a result of the Exercise.

101.  In this regard, the Defendant does not contend (and has not pleaded) that the Plaintiff intended its investments in the UMS Shares to be a long term investment. The Defendant’s case as pleaded in its Amended Defence has always been about the Defendant’s intention as regards its investments in the UMS shares. However, it is the Plaintiff, not the Defendant, that is the taxpayer and it is the Plaintiff’s intention that is relevant to the question of whether the UMS Shares were acquired as capital or for the purpose of trade.

102.  In any event, the undisputed evidence is that the Plaintiff had realised 49% of the UMS Shares it held less than one year after its acquisition under the Exercise, and caused all of the remaining 51% of the UMS Shares it held to be sold by May 2017. This suggests that the Plaintiff’s intention was to dispose of the UMS Shares in the short term.

103.  To get around the above difficulty, the Defendant contends that its intention must be imputed to the Plaintiff.

104.  However, on the Defendant’s own case, it is the intention of the Plaintiff’s controlling mind which should be attributed to the Plaintiff. This would be ICBCIF as it controlled the Plaintiff at both the board and shareholders levels. The Defendant has not otherwise cited any authority for its contention that the Defendant’s intention could be attributed to the Plaintiff simply on the basis that the Defendant had an indirect interest in 49% of the UMS Shares. Mr Cheung in his submissions has referred me to D60/87 3 IRBRD 24 at 27 and D67/88 4 IRBRD 95 at 101 for the proposition that there could be different intentions on the part of different parties to a joint venture. However, these cases concern the tax liability of parties to a joint venture, whose intentions might of course be different; they do not stand for any proposition that a minority shareholder’s intention could be attributed to the company simply by virtue of an indirect interest in the company’s asset.

105.  Further, even assuming that the Defendant’s intention could somehow be attributed to the Plaintiff, it is well established at law that a taxpayer’s intention must be genuinely held, realistic and realisable and that such intention can only be judged by considering the whole of the surrounding circumstances. It is often said, and rightly so, that actions speak louder than words: CIR v Common Empire Ltd (No 2) [2007] 3 HKLRD 75 at §46 per DHCJ To (as he then was).

106.  However, in my judgment, the objective evidence and the testimonies from the Defendant’s own witnesses demonstrate that the Defendant’s intention at the time of acquiring the UMS shares was to sell them whenever the price was favourable or whenever the circumstances were right, rather than to hold the UMS shares on a long term basis. In this regard:

a. Between 9 November 2015 and 6 July 2016, the Defendant held the 59,409,344 UMS shares it received from the Exercise through First Shanghai.

b. On 6 July 2016, the Defendant sold its first batch of UMS shares. Subsequently and until June 2017, the Defendant executed numerous trades of UMS shares (mostly sell trades) whilst acquiring other stocks such as Vianet Group and PSBC. The Defendant had sold all of its UMS shares by June 2017.

c. As to the reasons for the Defendant’s disposal of the UMS shares:

i. I do not accept the evidence of the Defendant’s witnesses (Mr Zhang and Mr Ling) that it was a result of the Plaintiff’s commencement of the BVI Proceedings. By 16 March 2017 (ie the date of the commencement of the BVI Proceedings), the Defendant had already sold over 50% of the UMS shares it received in the Exercise.

ii. I also do not accept the evidence of the Defendant’s witnesses that the Defendant sold its UMS shares to meet the capital needs of its business. This, as Mr Zhang conceded under cross-examination, was not the main reason for the disposal. In fact, Mr Zhang’s testimony is that the Defendant sold and bought its UMS shares as part of its “cash pool” which suggests that such shares were treated as the Defendant’s liquid funds rather than capital investments. In any event, the purported reason of meeting capital needs is also inconsistent with the fact that the Defendant conducted buy trades during the material period.

d. Mr Zhang accepted under cross-examination that when the Defendant experienced financial difficulties in 2016, the Defendant sold UMS shares but could have chosen not to do so. The fact that the Defendant sold its UMS shares even when it had alternative means of financing undercuts its own case that it had the intention of holding the UMS shares in the long term.

e. The Defendant’s witnesses stressed that after its sale of the UMS shares, it or its shareholders or their nominees would buy them back from the open market. This, in my view, is inconsistent with the Defendant having an intention to hold the UMS shares in the long term.

f. Whilst the Defendant’s case is that a long term partnership between Liang Tong and UMS was contemplated at the time of the acquisition of the shares, there is no documentary evidence to show that such partnership ever came to fruition.

i. In this regard, Mr Cheung has drawn my attention to an internal investment report (环球租赁股权投资项目报告) prepared in around September 2014 by the ICBC group (“ICBC Investment Report”) which recorded Liang Tong’s assertion that it wished to become UMS’s strategic investor to achieve synergy. This is not, however, evidence of any substantial partnership reached between the parties.

ii. Even if any subjective intention of “long term intention” was expressed by the Defendant and its shareholders, such intention was not in my view genuinely held, realistic or realisable. Indeed, as Mr Ling agreed under cross-examination, one would not expect the IRD to accept the bare assertions of taxpayers as to their historical intentions.

107.  In the circumstances, despite the Defendant’s contentions to the contrary, I accept the Plaintiff’s case that it was carrying on a business in acquiring and realising the UMS Shares.

Did the Plaintiff realise profits which were revenue in nature?

108.  It is well established that only realised and not potential or anticipated profits that would be subject to profits tax: Nice Cheer Investment Ltd v Commissioner of Inland Revenue (2013) 16 HKCFAR 813 at §21 per Lord Millet NPJ. The IRD assesses profits in accordance with the ordinary principles of commercial accounting: Nice Cheer at §35 per Lord Millett NPJ.

109.  By the Exercise, the Plaintiff transferred to the Defendant 59,409,344 UMS shares worth about HK$362M in return for the discharge of the Defendant’s Shareholders’ Loan in the equivalent sum of HK$186,363,434 and the Repurchase of the 49 shares in the Plaintiff held by the Defendant.

110.  The Plaintiff’s profits in the Exercise would be the value of the Defendant’s Shareholders’ Loan (ie HK$186,363,434) and the 49 shares in the Plaintiff less the cost of acquiring the 49% UMS shares (ie HK$186,363,434). In other words, the Plaintiff’s profit in the Exercise would be the value of the 49 shares in the Plaintiff (since the value of the Defendant’s Shareholders’ Loan and the cost of acquiring the 49% UMS shares are the same).

111.  As the Plaintiff was a special purpose vehicle with no operations, the value of the 49 shares would be the value of 49% of the UMS Shares which the Plaintiff held (ie around HK$362M based on the trading price of UMS shares at HK$6.09/share) less HK$186M (being the Defendant’s Shareholders’ Loan), which comes to around HK$176M.

112.  Therefore, by the Exercise, the Plaintiff has crystallised and realised its profit in the amount of around HK$176M in respect of the 59,409,344 UMS shares.

113.  Although the Defendant has advanced a number of contentions to the contrary, none of them is sustainable.

114.  First, the Defendant emphasises that the parties did not intend or agree for the Plaintiff’s 49 shares to be transferred at market value.

115.  However, a taxpayer’s intention can have little bearing on whether profits were in fact made. As mentioned in paragraph 108 above, when assessing profits, the IRD calculates the value of the shares based on ordinary principles of commercial accounting. Here, KPMG determined that the Plaintiff’s profit in the Exercise was about HK$176M, and this would reflect the Plaintiff’s profit as a matter of accounting principles.

116.  Second, the Defendant contends that the Repurchase was worthless to the Plaintiff and that no real, actual and realised profits have been made by the Plaintiff as a result of the Exercise. The Defendant submits that no monetary benefits have been received by the Plaintiff and that Ms Fong confirmed in her testimony that the Plaintiff has made profits only in the “accounting sense”.

117.  However, quite apart from the fact that Ms Fong’s testimony is consistent with the abovementioned principle that the IRD assesses profits in accordance with the ordinary principles of commercial accounting, she further explained in her testimony that after the Repurchase, the Plaintiff no longer owed any obligation to the Defendant as its shareholder. The Plaintiff gave valuable and substantial consideration (ie the difference between HK$362M and HK$186M) for those shares. In my view, the Repurchase was not worthless to the Plaintiff and that real, actual and realised profits have been made by the Plaintiff.

OBLIGATION OF THE PLAINTIFF TO ACT FAIRLY AND NOT IRRATIONALLY

118.  As an alternative case, the Defendant contends that under the Deed, the Plaintiff was given a wide and seemingly unqualified power to form its opinion on whether profits tax was so chargeable against the Plaintiff, to file a profits tax return and to control the complaint process. Such a wide and unqualified power should be read as being subject to an implied requirement that it could only be exercised fairly and not irrationally.

119.  In support, the Defendant points to various factual matters and submits that the Plaintiff’s decision to exercise its rights under the Deed and its withdrawal of a tax assessment objection and/or failure to apply for a correction was tainted by unfairness, irrationality and unreasonableness. The main matters relied upon by the Defendant include:

a. The Plaintiff’s failure to appreciate the true nature of the Exercise which should not be considered a profit making exercise.

b. The Plaintiff’s ignorance of the investment background and its internal documents (in particular the ICBC Investment Report) which show the Defendant’s long term investment intention and the fact that the Defendant indirectly held 49% of the UMS Shares.

c. In seeking the PwC advice, the transfer price of HK$6.09 was wrongly asserted and hence the opinion provided was erroneous.

d. The Plaintiff’s failure to consider the plea made by Mr Ling in his e-mail of 7 January 2016 requesting Mr Leon Peng of ICBC Holdings to consider that the “gain” was capital in nature and hence exempted from profits tax.

e. The Plaintiff did not further consult the Defendant when it filed the tax return. Further, the Plaintiff withdrew the objection against the IRD’s assessment without informing the Defendant.

120.  In view of my findings above regarding the construction of the Deed and the correctness of the assessment by the IRD, these alternative complaints by the Defendant must also fail. I would only add as follows.

121.  First, I do not accept the Defendant’s contention that the Plaintiff had an implied obligation to act fairly and not irrationally in the circumstances of this case. An implied obligation of good faith would not be imported to constrain a discretion which merely involves a simple decision of whether or not to exercise an absolute contractual right: Habib Bank Zurich (Hong Kong) Ltd v Creation Castle Ltd & Ors [2020] HKCFI 1062 at §§63-67 per DHCJ Dawes SC. Here, the Plaintiff’s contractual right is a simple decision of whether or not to require the Defendant to indemnify its tax liability to the IRD as a result of the Exercise. The range of options relied upon by the Defendant (such as whether to pursue an objection or to apply for a correction under s70A of the IRO) are non-contractual in nature and therefore beside the point.

122.  Second, even if a requirement to act fairly and rationally were to be implied, I do find that the Plaintiff has acted fairly and rationally throughout. The Plaintiff acted upon the professional advice of its auditors (KPMG) and tax advisor (PwC). In this regard, the Defendant complains that the Plaintiff had failed to provide the ICBC Investment Report to PwC. However, that report does not shed light on the Plaintiff’s investment intention, and it is difficult to see how it would have materially affected PwC’s advice.

123.  In the circumstances, I do not agree with the Defendant that the Plaintiff was acting unfairly or irrationally in opting not to pursue an appeal which was without foundation. Rather, in my view, the Plaintiff acted reasonably in not incurring further costs in pursuing an unmeritorious tax appeal.

RELIEFS

124.  In light of the above, I find that the Defendant is liable to indemnify the Plaintiff in respect of the Tax Liability for the sum of HK$28,860,875.

125.  In addition, the Plaintiff seeks to recover the reasonable legal costs incurred in the BVI Proceedings pursuant to Clause 4.1 of the Deed.

126.  In this regard, I understand the relevant procedural history in the BVI Proceedings to be as follows:

a. The Defendant filed a Notice of Opposition in the BVI courts on 31 March 2017 opposing the BVI Proceedings on various grounds, including that the debt was disputed and/or that the debt arose under the Deed which contained an exclusive jurisdiction clause (“EJC”) in favour of Hong Kong courts. The EJC is contained in Clause 6 of the Deed as follows:

“The courts of Hong Kong have exclusive jurisdiction to settle any dispute arising out of or in connection with this tax indemnity deed (including a dispute regarding the existence, validity or termination of this tax indemnity deed) (a “Dispute”). The parties to this tax indemnity deed hereto agree that the courts of Hong Kong are the most appropriate and convenient courts to settle Disputes and accordingly no party will argue to the contrary.”

b. On 12 April 2017, after hearing the parties’ submissions, the BVI court ordered, inter alia, that the BVI Proceedings be stayed for 14 days and that in the event that neither party applied to lift the stay within such time period, the BVI Proceedings shall stand dismissed with costs payable by the Plaintiff to the Defendant in an amount to be assessed if not agreed.

c. As neither party applied to lift the stay, by a consent order made by the BVI court on 16 June 2017, the BVI Proceedings were dismissed and the costs payable by the Plaintiff to the Defendant were assessed. In the consent order, it was recorded that the Plaintiff reserved its right to seek to recover sums payable pursuant to the terms of the Deed.

127.  In the present context, the Plaintiff contends that if this Court were to rule in its favour on the main issue of liability, this would mean that the Defendant ought not to have denied that the debt was owing to the Plaintiff in the first place and that the Plaintiff was reasonable in taking out the BVI Proceedings, especially in light of Mr Zhang’s assertion in the WeChat messages to Mr Xu to the effect that the Defendant had no money to pay and that Liang Tong’s business had ceased.

128.  However, the Defendant contends that the BVI legal costs were not reasonably incurred since the Plaintiff well knew that the Defendant was seriously contesting the correctness of the tax calculations and that the Deed contained the EJC such that BVI was not the proper forum for resolving the dispute between the parties.

129.  It seems to me that the reasonableness of the Plaintiff’s commencement of the BVI Proceedings would heavily depend on whether, as a matter of BVI law, it was permissible or reasonable for a creditor to pursue a debtor company incorporated in the BVI by way of winding up proceedings in the BVI courts in view of the existence of the EJC pointing to the resolution of all disputes arising under the contract between the parties in another court (in this case the Hong Kong courts). However, neither party has adduced any BVI law evidence in this regard (and in particular on the effect of the EJC contained in Clause 6 of the Deed) for the purpose of this action before me.

130.  Given that the burden of proving a claim rests with the claimant, I am not persuaded, based on the materials before me, that the Plaintiff has demonstrated that the legal costs incurred in the BVI Proceedings are reasonable and should be recoverable against the Defendant under Clause 4.1 of the Deed.

131.  In addition to the above, the Plaintiff also seeks the following reliefs against the Defendant:

a. Pre-judgment interest at the HSBC prime rate +1% on the sum of HK$28,860,875 from 27 February 2017 (ie 7 business days from the date of the Plaintiff’s formal written notice to the Defendant dated 16 February 2017 pursuant to Clause 4.1 of the Deed).

b. Post-judgment interest at judgment rate on all sums found due.

c. Costs of this action on an indemnity basis pursuant to Clause 4.1 of the Deed with certificate for two counsel.

132.  Mr Cheung has helpfully indicated to the Court that the Defendant has no quarrel with these reliefs in the event that I should find in favour of the Plaintiff on the main liability issue. I will therefore so order.

ORDERS

133.  For the above reasons, I grant judgment in favour of the Plaintiff against the Defendant and make the following orders:

a. The Defendant do pay the Plaintiff the sum of HK$28,860,875 being the amount of the Tax Liability.

b. The Defendant shall pay to the Plaintiff pre-judgment interest on the HK$28,860,875 sum at the HSBC prime rate +1% from 27 February 2017 to the date of this judgment and thereafter at judgment rate until payment in full.

c. An order nisi that the costs of this action (including all costs reserved) be paid by the Defendant to the Plaintiff on an indemnity basis with certificate for two counsel, such costs to be taxed if not agreed.

134.  I thank all counsel for their helpful and able assistance.