SECRETARY FOR JUSTICE v. CHUN KAM CHIU

HCA 919/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 919 OF 2002

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J U D G M E N T

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1. This is an appeal brought by the Defendant against an order made by Master June Wee on 15 October 2002, granting the Plaintiff summary judgment in this action.

2. The Defendant is and was at all material times the person behind a group of companies, which used to be very active in the property market. With the collapse of the property market following the onset of the Asian economic crisis, the group went into difficulties. Two of the companies within the group owed to the Inland Revenue Department substantial amounts of unpaid profits tax. Judgments were obtained by the Commissioner in the District Court in relation to the unpaid taxes. A third company within the group was very much behind in its filing of the tax return. In those circumstances, the Commissioner was quite entitled to make assessment of his own relating to the assessable profits and demand payment of tax accordingly.

3. By two personal guarantees both dated 27 March 2000, the Defendant agreed to guarantee the repayment of the outstanding taxes/judgment debts of the two companies within his group by instalments respectively. Initially, repayments were indeed made by instalments, although payments were very often made late. But eventually no further payment was made.

4. The present action based on the two guarantees was therefore commenced against the Defendant in respect of the outstanding taxes in March 2002.

5. In the meantime, the Commissioner had, in the exercise of his statutory power, assessed the assessable income of the third company within the group which had failed to file the necessary tax return, made a demand in payment, and indeed obtained settlement of the tax demanded by serving notices for recovery on the purchaser of a property belonging to that company and the solicitors acting for the purchaser.

6. In this appeal, the Defendant through counsel runs two points. First, he argues that the two guarantees were the products of negotiations between the department and his staff. They represented only part of the "overall agreement" reached as a result of the negotiations. He asserts that as part of the overall agreement, the department agreed and undertook to grant an indulgence of 12 months to the third company in the group for its preparation and filing of the outstanding tax return. Yet in breach of this part of the overall agreement, the Commissioner made his own assessment and demanded payment of tax before the expiry of the 12-month period. The Defendant argues that as a result, he is discharged from performance of the two guarantees.

7. In support of this story, the Defendant as well as a fellow director have filed affirmations, detailing the negotiations in question and the reaching of the agreement, as well as exhibiting some documents to show that there was indeed reached this oral agreement.

8. Mr Chau, appearing for the Plaintiff, argues that this assertion of an overall agreement whereby the Commissioner agreed to grant an indulgence to the third company for the filing of its tax return within 12 months is wholly incredible or unbelievable, this being the test that should be adopted in an Order 14 application regarding factual assertions made by a defendant on whom a threshold burden lies to show an arguable defence whether in law or on facts: Ng Shou Chun v Hung Chun San [1994] 1 HKC 155, 158G; Hong Kong Civil Procedure 2002 Vol. 1 paras 14/4/9 and 14/4/11.

9. Mr Chau points out to me the undeniable fact that the guarantees themselves made no mention whatsoever of this overall agreement or undertaking by the Commissioner to grant an indulgence relating to the filing of a tax return by the third company. No such mention can be found in many of the other contemporaneous documents or correspondence between the parties or their representatives. Indeed, after the Commissioner made his own assessment of the assessable profits of the third company, and demanded payment of tax accordingly, not only was there no complaint from the Defendant or his group of companies relating to the (alleged) breach of the Commissioner of the overall agreement (as per the Defendant's story), the Defendant actually complained in one of his affirmations that by the conduct of the Commissioner, he had been prevented from receiving money that he could otherwise use to pay the outstanding instalments due to the Commissioner pursuant to the two guarantees. Mr Chau also says that the first time that the overall agreement, the undertaking to grant an indulgence relating to the filing of tax return, and the allegation of breach by the Commissioner thereby entitling the Defendant to regard himself as having been discharged from the guarantees, were mentioned was when the defence was filed in May this year.

10. On the other hand, there is in evidence a copy minute of a board meeting of one of the two companies/judgment debtors held on 27 March 2000, the very day the guarantees were signed, clearly saying that the company had reached an overall agreement with the Inland Revenue Department, whereby the department agreed to allow the two companies within the group to repay the outstanding taxes/judgment debts by instalments, and to allow the third company a further period of 12 months to file its tax return, by reason of which agreement the Defendant, as a director of the company in question, agreed to personally guarantee the repayments by instalments. Mr Chau very fairly and properly refrains from suggesting, on the material and instructions available to him presently, that this board minute is not a genuine document, or that for any other reasons, its content is unreliable or does not mean what it says. Needless to say, this board minute is a piece of evidence supporting the Defendant's allegation of an overall agreement and the content of it. It cannot simply be brushed aside as an internal document within the Defendant's group of companies.

11. Moreover, in evidence is another copy memorandum dated 3 August 1999 written by a former staff member within the group directly responsible for negotiating with the Inland Revenue Department to the Defendant, reporting that the department had basically agreed with the group's suggestion to conduct negotiations on the basis of an overall repayment scheme; the memorandum also referred to the proposal made to the department that further time be granted to the third company for the filing of its tax return. This, in my judgment, also provides some contemporaneous documentary support to the Defendant's present factual assertion. Likewise, Mr Chau finds himself not in a position to suggest that this copy memorandum which has been exhibited to one of the latest affirmations filed by the fellow director of the Defendant (who supervised the negotiations done by the former staff member who wrote this memorandum) is not an authentic document.

12. This is not a case in which the Defendant has made a bare factual assertion of an oral agreement, which flies completely in the face of the contemporaneous documents. Apart from the board minute and the memorandum that I have specifically singled out for mentioning above, I also bear in mind a number of factors which tend to suggest that the Defendant's case is not totally unbelievable:

(1) The fact that the 2 guarantees were of essentially identical terms and signed on the same day, thus suggesting that at least in relation to the two companies in question, their outstanding taxes/judgment debts were being handled together in a global manner.

(2) The two guarantees were admittedly in the standard form used by the Commissioner. To some extent, this could potentially explain why in the body of the two guarantees, one could not find any reference to this alleged undertaking to grant an indulgence for the filing of tax return by the third company. Had one been concerned with a specifically drafted guarantee covering the two judgment debts in question, the Plaintiff's case would have been very much stronger.

(3) The Defendant's story is not inherently incredible. There is nothing inherently incredible about the Defendant wanting to come to some sort of agreement with the Inland Revenue Department on a global basis relating to all the companies in his group which were having trouble with the Inland Revenue Department. Indeed, some of the correspondences exhibited quite clearly show that the group handled the outstanding taxation matters with the department on a global basis. Thus for instance, there was a request by the group to the department to set off the tax of one company in the group that had already been paid but was thought to be refundable against the outstanding tax due and payable by another company within the group.

(4) In the light of the allegation of the existence of such an orally reached overall agreement with the department, none of the officers of the Inland Revenue Department who were personally involved in the negotiations have put in any evidence to rebut the allegation. None of the internal records of the department of the negotiations, apart from several exceptions, were put in evidence to refute the allegation of the existence of the oral agreement. Of course, I bear in mind that the burden is on the Defendant to show an arguable defence. But in the light of the assertions made in the affirmations filed by the Defendant, as well as the documents that have been exhibited to the affirmations filed by or on behalf of the Defendant, the absence of such response from the department is something that I can take into account. For the sake of completeness, I should point out that the affirmations filed on behalf of the Plaintiff in support of the present application and in response to the evidence put in by the Defendant were all made by officers who apparently were not personally or directly involved in the negotiations in question.

13. Much of all this has been canvassed at the hearing, and Mr Chau did try his best, by pointing out to me many documentary evidence as well as the general circumstances of this case, to neutralize or rebut the above-mentioned factors that would tend to support the Defendant's case.

14. But I must resist the temptation to try this case at this stage, particularly to try this case on paper. As has been said many many times before, the test here is not whether the Defendant's story is to be believed, which is a question that can only be answered by the trial judge on the entirety of the evidence presented before him or her at trial; rather the test is whether the Defendant's story is believable.

15. In my judgment, having seriously considered all the above-mentioned matters as well as the general circumstances of this case, I am unable to conclude that the Defendant's story is unbelievable. For this reason, the Defendant should not be shut out from the judgment seat.

16. Mr Chan also refers me to some textbook passages to the effect that in construing a guarantee, normally no extrinsic material can be looked at. Certainly that is correct. But the difficulty facing him is more fundamental: whether apart from the guarantees, something else has been (orally) agreed between the parties? Extrinsic evidence is admissible to answer that question by way of an exception to the parol evidence rule. This question has to be dealt with before one reaches the question of construction, to which the textbook passages relate.

17. Ms Wong, appearing for the Defendant before me at this hearing but not below, also argues that it is at least arguable whether the department has agreed to give the two companies, the outstanding taxes of which formed the subject matters of the two guarantees, time to pay, thereby discharging the Defendant from his obligations under the guarantees. In the light of my above conclusion, I need not, and indeed should not, express any definite view on this argument. All that I would like to say is that had this been the only argument raised by the Defendant in opposition to the application for summary judgment or in relation to this appeal, I would have much difficulty in concluding that the Defendant should be given a chance to defend the present action. There is much persuasion in Mr Chau's argument that mere passivity on the part of the Inland Revenue Department in demanding payment of the outstanding taxes in accordance with the instalment payment schedules was quite insufficient to constitute a legally binding agreement to give time; moreover, such an agreement would require the provision of adequate consideration to support. See generally Andrews & Millet, Law of Guarantees (3rd ed) paras 9.30 and 9.36.

18. However, given my conclusion relating to the first argument of Ms Wong, as I said, I do not wish to express any definite view on the validity of this argument.

19. In conclusion, I make an order allowing this appeal. It must be apparent from my above judgment that my decision relating to the first argument was to a substantial extent influenced by the copy board minute and copy memorandum exhibited to the second affirmation of the fellow director of the Defendant, which was only filed after summary judgment was granted by the learned Master below, and was indeed only filed two days before the hearing. My decision was also influenced to some extent by the lack of a full response from the department in relation to the matters alleged in that late affirmation and the lack of evidence in reply to address the implications of the exhibits to that affirmation, particularly from those officers who were personally involved in the negotiations. (At the hearing, I gave leave to the Defendant to file and rely on the late affirmation, but I indicated quite clearly that I would listen sympathetically to any application for an adjournment on the part of the Plaintiff. No doubt for good reasons of his own, Mr Chau did not ask for an adjournment but indicated to me that his side was prepared and ready to proceed with the hearing of the appeal.)

20. In those circumstances, I do not agree with Ms Wong that I should in fact dismiss the Order 14 summons which was taken out after the filing of the defence, which raised amongst other things, the two arguments that Ms Wong runs before me at this appeal.

21. In my judgment, the correct order to make is that the Defendant be given unconditional leave to defend the present action.

22. For the same reasons, as regards costs, in my judgment, the costs below should be made costs in the cause, with a certificate for counsel; the costs of this appeal should be paid by the Plaintiff to the Defendant in any event, such costs to be taxed if not agreed, the Plaintiff having already been awarded the costs of the Defendant's application at the hearing to adduce further or additional evidence.

23. The time for filing a reply has long expired. Mr Chau has not indicated to me that the Plaintiff would like to file a reply in case the appeal is successful. Given my decision, I am of the view that I should give directions for the further conduct of this action, which has to be resolved by means of a trial:

(1) the parties do file and serve a list of documents within 14 days from the date of this judgment;

(2) there be inspection of documents within 7 days thereafter;

(3) the parties do file and serve signed witness statements as to fact within 90 days from the date hereof, such statements shall stand as evidence in chief of the makers of the statements, subject to any further or other directions by the trial judge;

(4) liberty to apply for further directions.

24. I would like to thank counsel for the helpful assistance that has been rendered to me.