SHIU WING LTD. AND OTHERS v. THE COMMISSIONER OF ESTATE DUTY

CACV 199/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 199 OF 1998

(ON APPEAL FROM HCMP 1282 OF 1997)

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J U D G M E N T

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Godfrey, J.A. :

Introduction

1. Pong Ten Un ("the deceased") died on 23 January 1993, having disposed in his lifetime of some shares held by him in a number of Hong Kong companies and of two parcels of immovable property situate in Hong Kong ("the Hillview property" and "the YTIL property"). The defendant has sought to charge the plaintiffs with estate duty in respect of these various dispositions. Findlay, J. having declared, on 18 June 1998, that they were not chargeable to estate duty, the defendant now appeals. The central issue in the case is whether the dispositions fall to be treated for estate duty purposes as transfers, made by way of gift, of property situate in Hong Kong.

The facts : (1)

What did the deceased do?

2. What the deceased did is not the subject of dispute.

3. In December 1989, there were constituted, in the Isle of Man, 5 unit trusts. These 5 unit trusts were the SW Steel Unit Trust, the SW Investments Unit Trust, the Mack Unit Trust, the Hillview Unit Trust, and the YTIL Unit Trust. The sole trustee of each of those unit trusts was the first plaintiff ("SWL"), a Manx company incorporated on 18 December 1989. The directors of SWL were the deceased's wife ("the mother") and his 7 children, Harry, Frank, David, Edward, Stanley, Elizabeth and Teresa. The sole shareholders in SWL were the second plaintiff ("Futurian") and the third plaintiff ("SKL"). The directors of Futurian were the mother, Stanley, Elizabeth and Teresa. The directors of SKL were Harry, Frank, David and Edward.

4. On 25 January 1990, the deceased made the following transfers of property to SWL: (1) 2,590,000 shares in Shiu Wing Steel Limited ("the SWSL shares") in SWL's capacity as sole trustee of the SW Steel Unit Trust; (2) 68,800 shares in Shiu Wing Investments Limited ("the SWIL shares") in its capacity as sole trustee of the SW Investments Unit Trust; (3) 1,100 shares in Easiatic Warehouse and Forwarding Limited ("the EWFL shares") in its capacity as sole trustee of the SW Investments Unit Trust; (4) 4,700 shares in Mack & Co. (Freight Forwarders) Limited ("the Mack & Co. shares") in its capacity as sole trustee of the Mack Unit Trust; and the Hillview property, in its capacity as trustee of the Hillview Unit Trust.

5. Also on 25 January 1990, the deceased as settlor made a transfer of HK$42,200,000 to the second plaintiff ("Futurian") and the third plaintiff ("SKL") in their capacity as joint trustees of a Manx trust known as the Pong Ding Yuen Trust. Futurian and SKL were the sole holders of units in the Unit Trusts (apart from one initial unit in the Hillview Unit Trust issued to the mother); Futurian as sole trustee of trusts constituted (it seems) primarily for the benefit of Harry (The Gnop Yrrah Trust); Frank (the Jelik Trust); David (the NTA Trust) and Edward (the Samaral Trust); and SKL, as sole trustee of trusts constituted (it seems) primarily for the benefit of Stanley (the Music Box Trust); Elizabeth (the Pong Yeng Trust); and Teresa (the Pong Seong Trust).

6. The above mentioned transfers constituted the first step in a composite transaction, or pre-ordained series of transactions, effected in Macau, a contemporaneous step in this series being the provision of consideration for the transfers of property to which I have referred. This consideration was provided as follows :-

(1) the mother borrowed $139,000,000 by way of unsecured loan from a bank;

(2) she transferred the money to SWL;

(3) SWL used part of the money to provide consideration for the transfer by the deceased to SWL of the SWSL shares, the SWIL shares, the EWFL shares, the Mack & Co. shares, and the Hillview property; and it used the balance of the money to acquire from the deceased's children shares held by themselves in the same companies;

(4) the deceased then transferred the money representing the consideration for the shares to Futurian and SKL in their several capacities as sole trustees of the 7 children's trusts mentioned above, and the money representing the consideration for the Hillview property to Futurian and SKL in their capacity as joint trustees of the Pong Ding Yuen Trust;

(5) Futurian and SKL undertook to repay the money on demand; as the deeds recording the transaction show, it had been provided by the deceased free of interest and without security, and the right to repayment was in effect expressed to be personal to the deceased;

(6) Futurian and SKL then used the money to pay SWL for units in the 5 unit trusts;

(7) SWL then used the money to repay the mother the money which the mother had earlier transferred to it;

(8) The mother then repaid the money to the bank.

7. The money used to finance these transactions was provided, in the beginning, as we have seen, by the bank to the mother, and, in the end, returned by the mother to the bank. Each set of transactions was financed by circular movements of money, each one of which took the following route; bank to mother; mother to SWL; SWL to deceased (or child); deceased or child to Futurian or SKL ; Futurian or SKL to SWL; SWL to mother; and mother to bank.

8. Finally on 25 January 1990, the deceased made a Manx will expressed to forgive at his death all debts owed to him by Futurian or SKL.

9. On 24 October 1990, the steps taken on 25 January 1990 in relation to the transfers of property effected on that day were replicated in respect of the YTIL property.

10. On 24 October 1991, the deceased, anticipating what he had done by his will of 25 January 1990, released by deed inter vivos the debts recorded by deed and owed to him by Futurian and SKL as a result of the 25 January 1990 transactions, and, on 22 October 1990, he did the same in respect of the debts owed to him as a result of the 24 October 1990 transactions.

11. On 23 January 1993, as I have already mentioned, the deceased died.

The facts : (2)

Why did the deceased do all this?

12. This is not the subject of dispute, either. The deceased had a number of good reasons for effecting these transfers of property. There was uncertainty as to the future of the commercial operations in Hong Kong of Shiu Wing Steel Limited; including a possibility of the transfer of some or all of its operations to Canada; there was uncertainty as to the political and economic risks (including possible exchange control measures) attendant on the resumption in 1997 by the People's Republic of China of sovereignty over Hong Kong; and there were others. These considerations indicated a need for the deceased (and his children) to take measures for the protection of their assets. And, in 1990, the deceased was some 85 years old and suffering from cancer. This indicated a need for the deceased to take estate planning measures to avoid or mitigate the incidence of estate duty on his death. The deceased's motives, or reasons, for acting as he did cannot fairly be characterised as purely or solely fiscal. His motives were mixed; his reasons for acting as he did were partly fiscal and partly non-fiscal.

The facts : (3)

What was the purpose of doing it in this way?

13. This is the real area of dispute. As I see it, the deceased chose (obviously on specialist advice, though there is no evidence about it) to achieve his objectives by a scheme involving the use of a pre-ordained series of transactions into which were inserted steps that had no commercial purpose apart from the avoidance of the liability to estate duty which in the absence of those particular steps would have been payable. The true and only reasonable conclusion on the facts of the present case is that, although each step in this series took effect according to its tenor, the purpose of this pre-ordained series of transactions was purely fiscal. The purpose was to bring about this "end result"; that (in economic as distinct from legal terms) the deceased's beneficial interest in all the transferred property would pass on or before his death from the deceased to his children.

The charge to estate duty

14. Estate duty is payable on all property of a deceased person passing on his death; section 5 of the Estate Duty Ordinance, Cap. 111. This includes property taken under a disposition made by the deceased, purporting to be operate as an immediate gift inter vivos, whether by way of transfer, delivery, declaration of trust or otherwise, not bona fide made 3 years before the death : section 6(1)(c). But estate duty is not payable on property situate outside Hong Kong : section 10(c).

The plaintiffs' case

15. The plaintiffs say that on the facts the only "gifts" made by the deceased were effected when the deceased released inter vivos the debts due to him by Futurian and SKL and when he transferred the proceeds of sale of the Hillview property to them as trustees of the Pong Ding Yuen Trust. The debts, and the sale proceeds of the Hillview property, being situate outside Hong Kong when so transferred, no charge to estate duty arises. What happened in Hong Kong were, in effect, "sales", not "gifts", of the deceased's property.

The defendant's case

16. The defendant says that the transactions in question, whereby the deceased's property situate in Hong Kong was converted into property situate outside Hong Kong before any gift of it was made by the deceased, ought, for fiscal purposes, to be disregarded. If these transactions are disregarded, the end result for fiscal purposes, says the defendant, is that the deceased is to be treated as having made, less than 3 years before his death, gifts of the property now held by the plaintiffs as trustees of the children's trusts.

The issue

Do the transactions detailed above fall to be disregarded for fiscal purposes?

17. In my judgment, they do. This conclusion is dictated if it is accepted (as I consider it must be accepted) that these transactions served no commercial purpose. It is irrelevant that the deceased was motivated to act as he did for reasons which were not purely fiscal; motive and purpose are, in my judgment, discrete concepts. Likewise, it is irrelevant that for all purposes other than fiscal purposes all the transactions, whatever induced them, must be upheld as taking effect according to their tenor.

18. That this is the right approach to the resolution of the dispute between the parties here clearly appears from the case of W.T. Ramsay Limited v. IRC [1982] AC 300. The judge below succinctly summarised what has come to be known as "the Ramsay principle" in the following terms (on which I cannot improve) :-

"..... where there is a single composite transaction into which steps are inserted that have no business purpose apart from tax avoidance, the inserted steps may be disregarded for tax purposes, and the charging provision applied to 'the end result'."

This approach has been judicially re-stated many times and I do not propose to lengthen this judgment with unnecessary citation or further exegesis. It will be sufficient to refer only to the most recent case cited to us, Westmoreland Investments Ltd. v. Macniven [1998] STC 1131. That case went in favour of the taxpayer on its facts; but, in my judgment, what we have in our case is what was described in that case as "an artificially contrived concatenation of transactions" (see per Peter Gibson LJ at 1142 e-f) devised not for any commercial purpose but to convert, for the purpose of avoiding estate duty, shares and property situate within Hong Kong into property situate outside Hong Kong so as to make gifts of it offshore rather than onshore. In my judgment, this conversion, all done with smoke and mirrors and involving no commercial use of any money, falls, for fiscal purposes, to be disregarded. The real transaction here, the "end result", was a gift of Hong Kong property by the deceased to his children.

Result

19. I would allow this appeal on this ground, and make declarations in a sense contrary to those made by the judge. It is unnecessary to deal with the alternative argument raised by the defendant, that the transactions effected here can be impugned as a sham, or as having no legal effect. It is also unnecessary to deal with his further alternative argument that the transactions are "associated operations" as defined in the Estate Duty Ordinance, resulting in a charge to charge to estate duty on that ground. These arguments raise questions of some difficulty which need not be resolved for the purpose of disposing of this appeal.

Rogers, J.A. :

20. This was a slightly unusual Action in that the Plaintiff brought action for declarations that no estate duty was payable in respect of a number of transactions. When it became clear that those responsible for administering the estate of the late Mr. Pong Ten Un could not reach agreement with the Commissioner of Estate Duty, instead of waiting for an assessment to be made and challenging that assessment, this Action was commenced.

21. The Order that was made was slightly different from that framed in the Originating Summons. It may be summarised that there were declarations that no estate duty was payable in respect of :-

(a) the transfer of shares of 4 companies and 2 properties to the First Plaintiff; and

(b) the transfer of the sum of $42,200,000.00 to the Second and Third Plaintiffs.

22. In respect of each Plaintiff they were said to be acting as trustees of different trusts.

23. The Commissioner appeals against that Order. There was no counterclaim. There is no cross-appeal.

24. The issue argued in this appeal on behalf of the Commissioner is whether he is correct in his contention that the deceased, the late Mr. Pong Ten Un, should be treated as having made a gift, whilst he was alive, of his Hong Kong shares and property to the First Plaintiff in its capacity as a trustee of the 5 Manx unit trusts for the benefit of Mr. Pong's wife, 7 children and his grand-children. The countervailing contention on the part of the Plaintiffs is that the steps which were taken have not resulted in there being liability to estate duty in respect of what may collectively be termed the "Hong Kong properties" now owned by the First Plaintiff. It is said that the transfers were the consequences of legitimate exercises of the deceased's right to adopt whatever course was more advantageous even if there were a tax purpose influencing his choice.

Background

25. Amongst the subject matter in this case are shares in the companies which controlled the Shiu Wing steel business. The papers disclose that at the relevant time Shiu Wing was by far the largest producer of steel bars in Hong Kong. One of the companies, Shiu Wing Investments Limited, had a 59% shareholding in Shiu Wing Steel Limited, the company which operated the steel business. The late Mr. Pong had a 6.58% interest in Shiu Wing Investments Limited. His 5 sons had a similar interest and his wife had and has a 60.52% interest. As regards Shiu Wing Steel Limited, Mr. Pong had a 5.76% interest whereas the 5 sons each had 0.8% interest, one daughter had a 0.66% interest and the wife had 21.09% interest.

26. Mr. Pong was originally the Chairman and Governing Director of Shiu Wing Steel Limited. During the 1970s and early 1980s, Mr. Pong gradually dissociated himself from the day-to-day operations of the company. In about 1982, he was diagnosed as having cancer of the bladder.

The uncertainties in relation to the Shiu Wing Steel premises

27. In May 1988, Shiu Wing Steel Limited was informed by the Hong Kong Government that the presence of the steel works in Junk Bay was incompatible with the development of Junk Bay. It was suggested that the steel works should be moved to Tuen Mun. It was indicated that if no agreement were to be arrived at, the site which the company then occupied in Junk Bay might be resumed.

28. If not before, the company was by then aware that there was a strong likelihood that the Junk Bay steel works would have to be closed. Even if the land were not surrendered, the steel works would not be permitted to remain for environmental reasons. Nevertheless, in September 1988, the company decided to acquire a second arc furnace. It had always been the intention of the company to allow for this expansion. The commitment of funds was not excessive as regards the company in the light of its existing commitments, turnover and working capital. Such an investment was also considered to have a potentially advantageous effect on the amount of compensation that might in the end be paid by Government.

29. On 4th October 1988, Mr. Pong wrote to the Secretary of Lands and Works with proposals in relation to the re-location of the steel works. This was the last important function he performed on behalf of Shiu Wing Steel Limited. The process of negotiation and approval of the arrangements took almost another 6 years. In March 1993, the agreement which had been reached in principle between the Government and the company was approved by the Executive Council. In May 1994, the Finance Committee approved the deal.

The need for flexibility in the business arrangements

30. In the 1980s, those concerned in running Shiu Wing Steel Limited considered that it might be advantageous to expand operations into North America. There was a constant need to find a source of raw materials in the form of scrap steel and the operations needed to be expanded.

31. In 1987, professional advice was taken as to how best any expansion could be effected. Canada was one of the areas which was being looked at. The advice given was that because of the uncertainty then existing over the future of Hong Kong, it would be prudent not to use a Hong Kong company to acquire property overseas, specifically in Canada. It was considered that the perception of political risk and the risk of introduction of exchange control might have a detrimental effect upon the viability and acceptability of a Hong Kong company as an investment entity. Advice was given that a non-resident company or trust could acquire Canadian property. The members of the Pong family were advised that if family members were to move to Canada, it would be best to have their assets already in a non-resident trust before residence was established in Canada.

32. As explained in the second affirmation of Frank Fai Pong, the events of June 1989 hastened the decision of the Pong family to take steps with regard to the establishment of investment vehicles which would cater for some of the needs and concerns. In this regard, flexibility was the key. In many respects, the question of location of the holding trust was perhaps more a matter of perception than reality. Nevertheless, in financial matters, the outside perception, particularly of those overseas, is often important.

33. The "emigration" of many companies listed on the Hong Kong Stock Exchange in the late 1980's and early 1990's is a reflection of the same sentiment. Attention need only be drawn to the decision in Re. HongKong and Shanghai Banking Corporation Ltd. [1991] 2 H.K.L.R. 111. The Court was there dealing with the first case of a pure transfer of the shares of a holding company to a new holding company incorporated overseas, on this occasion in England. This was done by a simple takeover arrangement rather than through a reduction of capital. The Court referred to the need for the Court to be satisfied that intelligent and honest shareholders acting in their own interests would approve the scheme. Reference was then made to the scheme document. The central paragraph in the section of that document headed "Background to and reasons for the proposals" contained the following :-

"Moreover, HongkongBank's international activities and its group structure have led to increasingly frequent questions about its plans and future from overseas regulators, banks, depositors and other customers and from investors. HongkongBank believes that concerns on their part, although perhaps understandable in the light of the unprecedented future constitutional status of Hong Kong, are misplaced. The Board of HongkongBank is confident about the future of Hong Kong and believes that Hong Kong is and will remain both the most appropriate place from which to control HongkongBank's operations and a very important and profitable market. However, the concerns of people outside Hong Kong who deal with the group cannot be ignored; and this is another factor which leads the Board to conclude that the group's structure should be reorganised."

34. The Court concluded :-

"I am quite satisfied that it is in the interest of all the shareholders of the company for the court's sanction to be given."

35. Such, at any rate, was accepted thinking at the time. Indeed still to-day, by far the majority of companies quoted on the Hong Kong Stock Exchange are not incorporated in Hong Kong.

The transfer in question

36. The transfers of assets which are the subject of the present case have to be viewed in the light of the above facts. The Plaintiffs, nevertheless, do not seek to hide the fact that estate and tax planning benefits, both for the late Mr. Pong and other family members were a significant consideration in the arrangements that were eventually made.

37. On 24th January 1990, there was a meeting in Macau of most of the members of Mr. Pong's immediate family, apart it would seem from Mr. Pong's wife and one of the daughters, who were represented. What was to take place on the following day, the 25th January, was formalised in the form of resolutions of the various entities and other relevant documents. The steps which were taken have been identified in Godfrey, J.A.'s judgment. It is unnecessary to recite the effect of them further but I make the following observations.

38. Mr. Pong Ten Un resigned as Governing Director of Shiu Wing Steel Limited on 24th January 1990. He sold his shares both in Shiu Wing Steel Limited and in the other companies to the Plaintiff. The proceeds of sale of the shares were loaned to the 2nd and 3rd Plaintiffs. From the 25th January onwards there existed debts from the 2nd and 3rd Plaintiffs as trustees of various trusts owed to Mr. Pong. The fact that on 25th January Mr. Pong made a will, which forgave those debts, does not go, in any way, to deny the existence of those debts. Rather, it confirms them. Clearly, on his death, Mr. Pong would not wish his children, or the trusts in their favour, to be saddled, whether directly or indirectly, with any debts which might encumber their interests nor which might affect the family business. There would, presumably, be little point in Mr. Pong leaving the benefit of any debts to his wife, Madam Hong. As the shareholdings clearly demonstrate, Mr. Pong's wife already had a controlling interest in the steel companies and in Easiatic Warehouse and there can hardly have been any concern as to her welfare. It is more than understandable, therefore, that a person in the position of Mr. Pong would be concerned to see that his children would ultimately benefit.

39. It is also noteworthy that as stated Mr. Frank Pong's affirmation, and as demonstrated in the shareholdings in the various companies, Mr. Pong's children also entered into similar arrangements to that of their father. Whether or not there were loans similar to the specialty loans made by Mr. Pong is not known. This, if anything, strengthens the case, which is accepted, that there were genuine non-fiscal reasons for having the assets held by entities outside Hong Kong.

The statutory provisions

40. The statutory provisions relevant to this case are contained in the Estate Duty Ordinance (Chapter 111).

41. Section 5 stipulates that estate duty is payable on the value "of all property passing on the death ...".

42. Section 6 provides that :-

"(1) Property passing on death shall be deemed to include the property following -

(c) ... taken under a disposition made by him, purporting to operate as an immediate gift inter vivos, whether by way of transfer, delivery, declaration of trust, or otherwise, which shall not have been bona fide made 3 years before the death ..."

Property includes movable and immovable property and "disposition" is defined in the Ordinance as including :

"any trust, covenant, agreement or arrangement, whether made by a single operation or by associated operations, ..."

43. Importantly however, section 10 provides that :

"Estate duty shall not be payable in respect of -

...

(b) property situate outside Hong Kong;

..."

44. For completeness, I would add that under section 3 of the Ordinance, "associated operations" is defined as meaning :

"any 2 or more operations of any kind being -

(a) operations which affect the same property, or one of which effects some property and the other or others of which affect property which represents, whether directly or indirectly, that property or income arising from that property, or any property representing accumulations of any such income; or

(b) any 2 operations of which one is effected with reference to the other, or with a view to enabling it to be effected or to facilitating its being effected, and any third operation having a like relation to either of those two, and any fourth operation having a like relation to any of those three, and so on,

whether those operations are effected by the same person or by different persons, whether they are connected otherwise than as aforesaid or not, and whether they are contemporaneous or any of them precedes or follows any other;"

Liability to estate duty

Hillview

45. Because of the difference between the Hillview property and the shares in the companies and the YTIL property, it is appropriate to give it separate consideration. In simple terms, the transaction in relation to Hillview was as follows :

46. A loan of $42,200,000 was obtained by Madam Hong and the money was provided to the First Plaintiff as trustee of the Hillview Unit Trust. The initial units in the Hillview Unit Trust were owned by Madam Hong herself in respect of one unit and the Second and Third Plaintiffs in respect of the other. The money was used to purchase the Hillview property from the deceased. It may be noted that the Hillview property was residential property and not industrial property. Although the money was denominated in Hong Kong dollars, there is no suggestion that it was credited to a Hong Kong account at any time. At all material times it was off-shore, specifically in Macau. The deceased then made a gift of the money which was the proceeds of sale of the Hillview property to the Pong Ding Yuen Trust, the trustees of which were the 2nd and 3rd Plaintiffs. The deceased was the settlor of that trust but it is agreed on all sides that he took no interest under the trust. The names of the Specified Beneficiaries have been obliterated in the Court copies of the annexure to the trust deed, but it is probably fair to say that it does not take very much imagination to surmise that the Specified Beneficiaries were the wife and children of the settlor and that the children and grandchildren of the Specified Beneficiaries were the General Beneficiaries.

47. The Pong Ding Yuen Trust then used the gift from the settlor to purchase units in the Hillview Unit Trust; that money was then returned to Madam Hong who repaid the original loan which had been taken out.

48. The question then arises, specifically in relation to the Hillview property, as to whether this should be regarded as a gift of the Hong Kong property to Shiu Wing Limited in its capacity as trustee of the Hillview Unit Trust for the ultimate benefit of the trust for the relatives of the deceased.

49. Clearly, if the transactions are to be taken at their face value, the deceased did not make a gift of any property in Hong Kong. He first of all sold his Hong Kong land. For that, he received consideration in the form of a bank balance overseas. He then gave that away. That bank balance was never Hong Kong property and in view of section 10 of the Ordinance, no estate duty would be payable.

50. The Revenue's argument based on the Ramsay principle is that it is the end result to which consideration should be had. It is admitted, as I have said, that the trust structure which was set up in the Isle of Man to receive and hold the Hillview property had some non-fiscal purpose. Nevertheless, the Revenue's contention is that that purpose could have been achieved if the deceased had simply given Hillview to the 1st Plaintiff as trustee of the Hillview Unit Trust which might then have issued the requisite number of units in the discretionary trust.

51. Reliance is made, for example, upon the passage in Lord Fraser's speech in Furniss v. Dawson [1984] 1 A.C. 474 at 512F :

"The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately."

52. The Furniss case is an important landmark in the development of what has been called the Ramsay line of cases. That was apparently the first case in which the Ramsay principle was applied to what has been termed "linear transactions". Previously, the transactions which were the subject of consideration in relation to and the application of the Ramsay principle had been circular or self-cancelling transactions. In other words, in the cases where the Ramsay principle had been applied previously, there had been interposed in the transaction or transactions under consideration, a step or steps, designed normally to create a tax loss, but which had no ultimate effect on the transaction in question.

53. In the Furniss case, in simple terms, the taxpayer wished to sell the shares of his company to a company called Wood Bastow. Instead of selling the shares directly to Wood Bastow, Green Jacket, a Manx company, was interposed. On the facts found, it would appear that Green Jacket had been incorporated for the purpose. Certainly, it is crucial to the decision that Green Jacket had no other purpose other than to be a device to avoid the immediate payment of tax which would otherwise have arisen on the sale of the shares. The taxpayer transferred the shares which were to be sold to Green Jacket in return for newly issued shares in Green Jacket. Green Jacket then sold the original shares to Wood Bastow. It was held that the transaction was a disposal of the taxpayer's shares to Wood Bastow and thus subject to capital gains tax. The shares which Green Jacket issued were treated as payment. The value was treated as being the value which Wood Bastow had paid Green Jacket. This was despite the fact that it was observed that the only way the taxpayer would receive the money from the sale was either by loans from Green Jacket or when Green Jacket was wound up.

54. Lord Brightman's speech reaffirmed the Ramsay principle. He quoted from Lord Diplock's speech in the Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30 at p.32 as follows :-

"It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay's case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable. The difference is in approach. It does not necessitate the overruling of any earlier decisions of this House; but it does involve recognising that Lord Tomlin's oft-quoted dictum in Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, 19, 'Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be,' tells us little or nothing as to what methods of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straightforward way."

55. Lord Brightman was careful to emphasise (page 525 A-D) that Lord Diplock's formulation had not been changed from "a pre-ordained series of transactions ... into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax" to "a pre-ordained series of transactions ... into which there are inserted steps which have no enduring legal consequences." Lord Brightman's speech however is most often quoted for the passage in which he encapsulates the Ramsay principle as enunciated by Lord Diplock in the Burmah Oil case in the passage which is at p. 527 C-E :-

"The formulation by Lord Diplock in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. S.T.C. 30, 33 expresses the limitations of the Ramsay principle. First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. The composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end. The composite transaction does, in the instant case; it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax - not 'no business effect.' If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied."

56. The nature of the Ramsay principle as it was enunciated in the Furniss case was analysed by Lord Oliver in the case of Craven v. White [1989] 1 A.C. 398 at p.514 F-H where he set out 4 essentials. First, there should be a series of transactions which, at the time when the intermediate transaction was entered into, were pre-ordained to produce a given result. Second, the intermediate transaction should have no other purpose than tax mitigation. Thirdly, that there was at the time no practical likelihood that the pre-planned events would not take place in the order ordained and fourthly, that the events should take place.

57. In the same case, Lord Goff pointed out at page 520C that the Ramsay principle is not a moral principle but was a principle of statutory construction. Indeed, as Lord Steyn said in Inland Revenue Commissioners v. McGuckian [1997] S.T.C. 908 at 916 d-g, the Ramsay principle is another example of giving a purposive construction, on this occasion to a tax statute. Both Lord Goff in Craven v. White and Lord Steyn in the McGuckian case pointed out the natural consequence of that is that none of the cases, and in particular Furniss, can be considered to be a definitive statement of the law in terms of necessarily marking the limit on tax avoidance schemes.

58. In simple or colloquial terms, the purposive construction entails the Court asking "What was being done (by the taxpayer or on his behalf)?" If the taxpayer was either simply taking steps, one or more of which had no other purpose than to avoid tax or had inserted steps into another transaction which would have the effect of avoiding tax and had no other purpose than avoiding tax, then the Ramsay principle would apply. If, however, the steps in the transactions had a purpose, i.e. they had some valid reason, other than avoidance of tax, then the Ramsay principle would not apply. The epithet "non-commercial" has been applied to such non-tax avoidance purposes.

59. This point, that the intervening step should have no other purpose than tax avoidance, emerges not only from Lord Diplock's initial analysis and Lord Brightman's and Lord Oliver's expositions but is emphasised in the judgment of Millett, L.J. (as he then was) in the case Ingram v. Inland Revenue Commissioners [1997] S.T.C. 1234 at pp. 1269-70. For the purposes of Millett, L.J.'s judgment in that case, the Ramsay principle, did not become applicable. Nevertheless, the Judge, who had been involved as counsel in the early cases dealing with the Ramsay principle, and indeed was counsel for the Revenue in the Ramsay case, included a passage in his judgment devoted to the Ramsay doctrine.

60. He commenced by emphasising that the Ramsay principle allows the Court to disregard the artificial division of a single transaction into several steps or the insertion of steps which have no purpose except the avoidance of tax which would otherwise be chargeable. He emphasised more than once that the inserted steps should have no purpose other than tax avoidance. At the passage at 1270 B-C, he said :

"What is required to enable the court to disregard a transaction or step in a transaction is not the presence of a tax avoidance motive, but the absence of any other purpose. This is often described as the absence of any business purpose; but in this context business purpose does not mean commercial purpose but simply non-fiscal purpose. The circular and self-cancelling scheme in Ramsay and the artificial splitting of the disposal into two in Furniss v Dawson had no purpose at all except the avoidance of tax (see [1981] STC 174 at 181-182, [1982] AC 300 at 326 per Lord Wilberforce) describing transactions designed only to avoid tax and lacking otherwise in economic or commercial reality and citing Knetsch v United States (1960) 364 US 361 at 366 and Gilbert v Internal Revenue Comr (1957) 248 F 2d 399at 411."

Was the Hillview transaction unacceptable tax avoidance in terms of the Ramsay principle?

61. Is the Commissioner correct in asserting that because of the Ramsay principle, the Hillview transaction should be regarded as a gift of the Hillview property for the benefit of the beneficiaries of the Pong Ding Yuen Trust? In my view, in the light of the analysis of the Ramsay principle, what must be considered in broad terms is, "What were the steps in the transaction and what were they about?"

62. The transaction needs to be examined to see first of all what the steps were. On my analysis, they were as follows :-

(1) Madam Hong obtains a loan for $42,200,000;

(2) Madam Hong loans the money to the First Plaintiff as the trustee of the Hillview Unit Trust;

(3) The Hillview Unit Trust purchases the Hillview property for that amount;

(4) Mr. Pong puts the proceeds of sale, namely the amount of $42,200,000 into the Pong Ding Yuen Trust;

(5) The Pong Ding Yuen Trust purchases units in the Hillview Unit Trust for the benefit of the beneficiaries of the Pong Ding Yuen Trust;

(6) Shiu Wing Limited uses the money from the purchase of the units to repay the loan to Madam Hong;

(7) Madam Hong repays the bank.

63. The matter can be safely approached on the basis that each of those 7 steps were pre-ordained.

64. The next step is to see whether any of those steps were inserted for the purposes only of avoidance of tax. If it were said that steps (1), (2), (6) and (7), namely the procurement, passing on and subsequent repayment of the loans were artificial steps which were inserted in the transaction, the process would not be to ignore artificial steps but to recast the whole transaction. If no money were borrowed, there would be no sale.

The loans to Madam Hong

65. The loans taken out by Madam Hong from the Standard Chartered Bank in Macau on 25th January 1990 have been said to have been unrepresentative bank lending in any ordinary commercial sense. Indeed, criticism was levelled at the statement on page 11 of the judgment where the Judge said :-

"There is no doubt that the money went full circle: from the bank and back to the bank, or, probably, in a matter of minutes. But there is nothing unusual in that."

66. It may be that the average "millionaire" would be unable to persuade the average "bank manager" to provide a short-term loan of the amounts involved in these transactions but when one considers that Madam Hong had a direct 21.09% interest in Shiu Wing Steel Limited and an indirect interest of some 35.88%, via Shiu Wing Investments Limited, in the same company and that the turnover in 1989 for Shiu Wing Steel Limited had been HK$1,148,285,595 with a profit before taxation of over HK$85 m and assets valued even in those depressed days of well over HK$600 m, one can hardly attribute the difficulties of the average millionaire with their bank managers to Madam Hong. Nor should one under-estimate, perhaps, the eagerness of a bank manager to secure the goodwill of a person who clearly had control of such a substantial business. The risk to the bank was clearly negligible.

67. In short, therefore, I see nothing to displace the fact that Madam Hong borrowed the money in her own right and by reason of her own standing. She was a director of the First Plaintiff. If she had the capacity to borrow the money there was no reason why she should not do it as director of the First Plaintiff in this instance intending to benefit ultimately, presumably, from being a beneficiary of the Pong Ding Yuen Trust. The fact the money was borrowed in a manner that allowed it to be returned to the bank almost immediately does not affect the validity of the transaction.

68. It seems that it matters little whether Madam Hong borrowed the money for the purchase or the First Plaintiff borrowed the money. As I have indicated it would seem unlikely that Madam Hong would have had any difficulty in borrowing the money; furthermore as a director of the First Plaintiff she was in a position to effect whatever needed to be done on its part as well as to ensure that all precautionary steps could be taken.

Was there a step inserted into the transaction which had no other purpose than tax avoidance?

69. The major difficulty in the way of the Commissioner's argument based on the Ramsay principle is that it is not possible to say that there was any step which was inserted and such that it had no purpose other than to avoid tax.

70. The purpose or purposes of the various elements in the Hillview transaction has to be viewed in the light of the circumstances prevailing in 1990 and the intention of the Pong family including Mr. Pong himself. One of the purposes was to transfer assets to an overseas trust or other entity for the purpose of the overseas entity being in a position to use those assets for investment purposes abroad. The notion was to allay the concerns of people outside Hong Kong (perhaps in Canada) with whom the Pong family members might in the future wish to deal. In 1990, those concerns were real, even if misguided. The Pong family may themselves have considered them misplaced and no doubt had confidence in the future of Hong Kong. Nevertheless, in order to allay the concerns of others, it was necessary to have assets in an outside vehicle. For that to happen, the outside vehicle, namely in this case the Hillview Unit Trust, needed to acquire those assets.

71. There was thus a clear commercial purpose in the Hillview Unit Trust acquiring the Hillview property. Furthermore, the creation of a unit trust served the additional purposes of the Pong family by enabling the asset holding entity to be separated from and independent of the trust holding the interests of the various members of the Pong family. Thus, if it were desired to use the assets of the Hillview property as a security for overseas investment, no account need be taken of the various interests of the individual members of the Pong family. The creation of units and the holding of those units by the Pong Ding Yuen Trust served the purpose of identifying where necessary the individual interests of the members of the Pong family. Their individual interests could thus be readily divided and separated. The arrangement thus gave the members of the Pong family not only the collective financial and commercial advantage of having a substantial asset but gave them the individual flexibility in relation to their own affairs. Furthermore, because their interests were held by way of trust, they would, at least temporarily, be protected in relation to Canadian or other tax law outside the jurisdiction of Hong Kong where investments may be desired.

72. Thus it cannot be said that there was any part or step of the transaction that was inserted for the purposes of tax avoidance only. The ownership of the property by the unit trust and the separate ownership of the units in that trust by the Pong Ding Yuen Trust all had legitimate commercial purposes.

"The same effect could have been achieved if the transaction had been by way of gift"

73. It was also said that the purpose of the Deceased could have been achieved by way of gift. But that is not the way in which the transaction actually took place. A purposive construction entails seeing a transaction for what it really is or in other words looking at it without blinkers. A purposive construction does not permit the Court to recast transactions in another form for the benefit of the Revenue.

74. When the Ramsay principle requires that the transaction be looked at as regards the end result, it does not permit the recasting of the transaction by deeming it to have taken place in some other way which would achieve the same or a similar result; nor does it permit the omission of steps (1) and (2) identified in Lord Oliver's analysis to which I have referred.

75. The argument was raised that unless the reality of the situation were recognised, the payment of estate duty in Hong Kong would become a voluntary matter. It is, of course, true that the Courts must now be vigilant that the intention of the statute should be observed and should not be circumvented by means devised for the sole purpose of circumventing it. A simple illustration however, in my view, demonstrates that care is required before a transaction is declared unacceptable tax avoidance.

76. If a person has a deposit in a Hong Kong bank and chooses to transfer that abroad, the deposit then becomes property situate outside Hong Kong. Those concerned with a deposit of money outside Hong Kong are entitled to rely upon section 10 of the Ordinance. The person who has transferred his money from Hong Kong to overseas and deposited it in an overseas bank account could make a gift of that deposit in his lifetime. Even if he died within 3 years, estate duty would not be payable. Of course, if he made a gift of the deposit whilst it was in the bank account in Hong Kong, no subsequent transfer of the money overseas would avoid estate duty. The end result on paper might look the same.

77. It would be no use in the first set of circumstances for the Commissioner to argue that the deposit overseas should be regarded as a gift of money inter vivos in Hong Kong. Such an argument might only arise if it was pre-ordained that the money would be brought back to Hong Kong by the donee of the gift. In that case, even if the donor had transferred the money abroad himself before making the gift, it might be said that the steps of transfer abroad by the donor and the retrieval back to Hong Kong by the donee were steps inserted simply for the purpose of avoidance of duty.

78. Hence, the argument that estate duty should not be allowed to be a matter of choice has its limitations. In the case of the deposit in the bank account, it may well have some of the appearance of being voluntary. Certainly the order in which steps are taken can be important.

79. In considering the argument that the transaction should be treated as if it were the making of a gift of the Hillview property, it should be borne in mind that it is not possible to bestow the same quality of title to land by way of gift as can be acquired by way of purchase. A volunteer, in the legal sense, always takes subject to any equitable rights attaching to the property at the time when the legal interest is transferred to him. A volunteer does not become a purchaser for value merely because he undertakes to use the property in a particular way.

80. Moreover, as the law stands at present, it is a valid objection to title that the property in question was the subject of a gift within the immediately preceding 3 years. The reason is that under section 18 of the Estate Duty Ordinance, estate duty becomes a first charge on the property. As a consequence, it is considered that the donee cannot deliver title free from encumbrance. See Lee Siu Man v. Chu Chi Wing [1992 1 H.K.C. 266] and Chan Fung Lan v. Lai Wai Chuen [1997 1 H.K.C. 1]. It also has to be remembered that until the donor has died, the amount of estate duty on an asset subject to estate duty cannot be determined.

81. The result is therefore that a property which has been the subject of a gift within 3 years cannot be considered as commercially valuable as a property which has been purchased.

82. It has to be appreciated that the last point, that in relation to estate duty, might be said to be circular because it could be said that avoiding a defect in the title was equivalent to avoiding estate duty. Even if that be right, I do not consider that the Court is entitled to recast the transaction in a form which it was not.

The Ramsay principle does not apply to the Hillview transaction

83. In the analysis, therefore, I do not consider that the Ramsay principle applies to the Hillview transaction. This is primarily for the reason that there is no inserted step in the transactions that can be pointed to as being only for the purposes of tax avoidance.

84. As both Lord Steyn and Lord Goff have said, it cannot be assumed that the decision in the Furniss or any other case has marked the limits of the Ramsay principle. Nevertheless, whatever the limits of purposive construction as applied in the Ramsay principle, it would be going beyond the principle as hitherto formulated, to hold it was applicable where no additional step taken for a purely fiscal purpose is identified.

Was anything else given?

85. However, it seems to me that in considering the steps in the Hillview transaction the question has to be asked what exactly was being sold. In relation to step (3) as I have analysed it above, it cannot be said that the whole of the legal and beneficial interest in the Hillview property was sold by the Deceased to the Hillview Unit Trust. There was clearly a pre-ordained series of transactions. That dictated that Pong Ding Yuen Trust would be permitted to purchase effectively all the units in the Hillview Unit Trust. (There were, as I have indicated, 2 existing units of the Hillview Unit Trust, but I do not consider that that materially alters the situation.)

86. To use a colloquial expression, there were thus strings attached to the sale. To use a more legal turn of phrase, although the legal interest may have been conveyed it was subject to equitable considerations implied because of the pre-ordained series of transactions. In essence the Hillview Unit Trust obtained the legal title subject to the condition that it would sell the units which represented the value of the Hillview property as a commercial asset to the Pong Ding Yuen Trust. As regards the Pong Ding Yuen Trust, the Deceased gave it not only the cash but the right, if not the obligation, to take the benefit of the Hillview property as an asset from a commercial point of view. In other words in what ever way the wife and 7 children decided the asset would be used by the Hillview Trust, whether as means for investment or collateral or otherwise, the benefit of that was to be received by the beneficiaries of the Pong Ding Yuen Trust who were simultaneously being given the wherewithal (i.e. the $42,200,00) to put themselves in the position of being the recipients of the benefit.

Should the trusts be treated as having been put an end to?

87. This is not to say, however, that I accept the argument that the Pong Ding Yuen Trust should be treated as having acquired the asset of the Hillview property pure and simple. It did not. Deliberately it did not. It acquired its interest under a trust. There were good commercial reasons for that.

88. The argument that the beneficiaries of the Pong Ding Yuen Trust should, in the present circumstances, be treated as having acquired the trust property, i.e. the Hillview property, themselves is in my view fallacious. If for no other reason, it fails to look at the circumstances of this case.

89. As I have indicated, there were strong commercial reasons for the Pong family to have the Hillview property held under an overseas trust. There was thus no likelihood or realistic possibility that the members of the Pong family would seek to put an end to the trust and treat the Hillview property as their own personal property.

90. Even if under the rule in Saunders v. Vautier (1841) 4 Beav. 115, 10 L.J. Ch. 354 the holders of the units in the unit trust and the beneficiaries under the trusts on which those units are held could have put an end to the trust and claimed the assets for themselves, that in the circumstances of this case was not even a remote possibility. The purpose of the establishment of the Hillview Unit Trust and the Pong Ding Yuen Trust was precisely because the members of the Pong family did not wish to own the assets in their personal names.

91. In consequence, I consider that the arguments which turn on clause 16 in the unit trust deed which provided that the unit holders should have no interest in the assets under the trust and the provisions of A3 and L1 and L2 which together, on the face of them, provide that the trustees should convert the trust property to money and that the unit holders should have no interest in any assets, are only of academic interest as far as this case is concerned.

Conclusion

92. But that, of course, is still sufficient to bring the matter in part within Section 6 of the Ordinance. Specifically the late Mr. Pong gave the Pong Ding Yuen Trust the right to buy the units in the Hillview Unit Trust. That right was the residue of the equitable interest in the property which Mr Pong had retained on the sale of the Hillview property. That right was the equivalent of, or at least very similar to, a share or stock option. Since the valuation of the property was the amount paid for it, namely $42,200,000, it must be very difficult to put a value on the right which Mr. Pong gave the Pong Ding Yuen Trust. The credit balance of the Macau account was, of course, at all times overseas property and is therefore not something that was subject to estate duty.

93. The result is therefore that the late Mr. Pong did not give the Hillview Trust anything. He gave the Pong Ding Yuen Trust a right which should, on paper at least, have had no ascertainable value. In any event, as I have indicated at the beginning, that is not the subject of any dispute between the parties whether as regards the declarations sought or any cross-claim.

The sale of the Shiu Wing Steel Limited shares

94. The sale of the Shiu Wing Steel Limited shares owned by Mr. Pong took much the same form as the Hillview property but with one exception. In the case of the sale of the Shiu Wing Steel Limited shares, Mr. Pong did not give the proceeds of sale to the 7 trusts administered by the 2nd and 3rd Plaintiffs but the proceeds of sale were lent to those trusts and what are termed specialty debts were created. The steps in relation to the sale of the shares were therefore as follows :-

(1) The obtaining of the loan by Madam Hong from the Standard Chatered Bank in Macau;

(2) The loan by Madam Hong of the $30,562,000 by Madam Hong to the SW Steel Unit Trust of which the 1st Plaintiff was the trustee;

(3) The purchase by the SW Steel Unit Trust of Mr. Pong's shares in Shiu Wing Steel Limited for $30,562,000;

(4) The loan of the sale proceeds by Mr. Pong to the 7 trusts and the creation of specialty debts in favour of Mr. Pong;

(5) The purchase by the 7 trusts of units in the SW Steel Unit Trust using the entirety of the proceeds which had been borrowed from Mr. Pong;

(6) The repayment of the loan by the SW Steel Unit Trust to Madam Hong;

(7) The repayment of the loan by Madam Hong to the Standard Chatered Bank in Macau.

95. As has been referred to, Mr. Pong made a will at the same time as these transactions were effected whereby he forgave the specialty debts which had been created.

96. On or about 21st October 1991, Mr. Pong signed a letter forgiving the specialty debts which had been created. That was transmitted to the Isle of Man and the specialty debts were cancelled on 24th October 1991.

97. The first thing to be noted is that the forgiving of the debts in 1991 by Mr Pong does not appear to have been a matter which was pre-ordained. There is no suggestion that it was part of the arrangements which were arrived at either on 24th January 1990 or immediately prior thereto. Indeed, the very existence of the will would indicate that in January 1990, Mr. Pong intended that the debts should continue to exist and should only be forgiven at the time of his death, whenever that might be.

98. The situation, therefore, pure and simple after the events of 25th January 1990 was that Mr. Pong had sold his shares in Shiu Wing Steel Limited to the SW Steel Unit Trust and had made a loan of the proceeds. There was therefore no gift of anything to anybody save perhaps the right to the various trusts to buy units in the SW Steel Unit Trust. The end result of the share transaction was therefore the loans.

99. It is unnecessary to repeat all the factors that were present in relation to the Hillview property but the purpose behind the transaction was the same in respect of the share transaction as it was in relation to the Hillview property. Indeed, one further factor must, in my view, not be lost sight of. Six of Mr. Pong's children, each transferred their own shares in Shiu Wing Steel Limited to Shiu Wing Limited. The result was that Shiu Wing Limited held a direct interest of 10.42% in Shiu Wing Steel Limited and an indirect interest through Shiu Wing Steel Limited of approximately nearly another 24%.

100. It was suggested in the course of argument that the transfer of the shares by the children would also be attributable to a desire to avoid estate duty. As I have previously noted in considering the matter in relation to the Hillview property, there were clear commercial and sound personal reasons for the transfer of the assets and to suggest that the children's shares were transferred solely for estate duty purposes, not only attributes an obsession in relation to estate duty on the part of the children but ignores the undisputed intent behind the transfer.

Were the loans shams?

101. It was faintly argued as a subsidiary argument on the part of the Commissioner that the loans should be treated by the Court as shams. A sham is something which was not intended to take effect in accordance with its tenor. In the words of Lord Diplock in Snook v. London and West Riding Investments [1967] 2 Q.B. 786 :-

"... it means acts done, or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create."

In my view, it cannot be said that the loans were shams. There is no reason to suggest that is so. Mr. Pong had, on 25th January 1990, made the will forgiving the debts. The fact that he made such a will does not support the proposition that the loans were shams. There is no suggestion that on 24th January 1990, it had been decided that Mr. Pong would release debts either in October 1991 or at any other time than upon his death in accordance with his will. No suggestion has been made that the dates in October of either 21st or 24th were of any significance. The events merely show that in October 1991, Mr. Pong, who was an elderly man, decided that he would forgive the foreign debts owed to him by the trusts.

102. It was said there could never have been an intention for the specialty debts to be anything other than a sham since the trusts never had the cash to repay the debts. It has to be observed however that a borrower often does not have the liquid assets for immediate repayment of a debt and indeed the primary purpose for a loan is to provide finance or, in other words, supplement insufficient cash resources or liquidity. It would seem that the trusts did have sufficient assets possibly to raise money from other sources to finance the loans, should Mr. Pong ever have demanded payment, or the assets could possibly have been sold to the other shareholders or even outsiders.

103. In seeking to support the proposition that the Ramsay principle applies to the loan transactions, Counsel for the Commissioner argued that the loan transactions should be disregarded because they were inserted only for fiscal reasons. Even if that were right, the argument would be wrong because the end result is a loan by Mr. Pong which cannot be ignored. The Ramsay principle is based on looking at the end result and ignoring the intermediate steps, if any are inserted to avoid tax. Once it is conceded or held that the loans were genuine and not shams, the end result on 25th January 1990 was that Mr. Pong was owed money.

Associated operations

104. Reliance was also placed upon the forgiveness of the loans in October 1991 as being an associated operation in relation to the transactions in January 1990.

105. In my view, this argument is invalid.

106. For the Commissioner's argument to succeed it would be necessary to show that if the step of forgiving the loans was taken simultaneously with their creation, or practically speaking that the loan transactions did not exist, and that the proceeds of sale were given to the trusts instead of being loaned to them (step (4) above), there would be a liability to estate duty. For the same reasons as in respect of the Hillview property even if the proceeds of sales shares were given to the trusts immediately upon the receipt by the deceased, rather than being loaned by him, I consider that it would not have given rise to estate duty.

The other companies

107. No distinction was drawn in argument between the shares in Shiu Wing Steel Limited and the shares in the other companies, namely Shiu Wing Investments Limited, Easiatic Warehouse and Forwarding Limited, Mack and Company (Freight Forwarders) Limited. Each transaction had slightly different aspects to it. In respect of Shiu Wing Investments Limited Mr. Pong's 5 sons had previously held shares in the company. They had an identical holding of 6.58% as did Mr. Pong. They too dealt with their shares by arranging the transfer of them into trust held by the 1st Plaintiff. In the case of Mack and Company (Freight Forwarders) Limited, Madam Hong only held a 3.53% shareholding whereas the deceased held a 41.49%. Mr. Pong's 5 sons, each had a shareholding but there was a substantial outside shareholding including what would, apparently, be that of a subsidiary of a well-known public company and other seemingly unconnected shareholders. In respect of the Easiatic Warehouse and Forwarding Limited, there were no other outside shareholders and the deceased held a comparatively small shareholding as did his wife. The company was effectively held by Shiu Wing Investments Limited.

108. No further points arise in relation to the YTIL property. This was sold in October 1990 and the specialty debt in relation to the proceeds of sale thereof was forgiven in 1992.

109. In my view therefore, the declarations granted in the Court below were correctly granted and I would dismiss the appeal accordingly.

Mortimer V-P:

110. The Commissioner of Estate Duty (the Commissioner) appeals against Findlay J's order of 9 July 1998, declaring that no estate duty was payable in respect of transfers of property made by the deceased to the three plaintiff Manx companies on 25 January 1990 and 24 October 1990.

The salient facts

111. The deceased died on 23 January 1993. Less than three years earlier he disposed of shares held by him in a number of Hong Kong companies and two real properties in Hong Kong, described during the appeal as "the Hillview property" and "the YTIL property". At the time of the transfers of this property, Mr Pong had a wife, Madam Hong, and seven children. He was then suffering from cancer.

112. The transfers were made pursuant to an elaborate, preordained scheme, the first step of which was the establishment of the three Manx Companies in December 1989. The steps which followed out are set out in the earlier judgments. I do not repeat them save to note that on 25 January 1990, the same day as the series of 20 transactions, the deceased made a Manx will by which he forgave at his death all the debts incurred in the initial transfers owed to him by Futurian or SKL.

113. So far as the YTIL property is concerned, similar transactions took place on 24 October 1990.

114. The specialty debts were never repaid. The deceased released these debts by deed in October 1991, thereby carrying to its conclusion the intention forecast in the Manx will.

The issue

115. The issue for our consideration is whether Findlay J's declaration that the deceased's transfers of property during his lifetime were not chargeable to estate duty is correct. The question is, therefore, as Godfrey JA set out "whether the dispositions fall to be treated for estate duty purposes as transfers, made by way of gift, of property situate in Hong Kong".

The Estate Duty Ordinance

116. Sections 5, 6 and 10 of the Estate Duty Ordinance (Cap. 111) are relevant to this issue.

117. By s.5, estate duty is payable upon "all property passing on the death ...".

118. Section 6(1)(c) provides that property passing on death shall be deemed to include property taken "under a disposition made by (the deceased), purporting to operate as an immediate gift inter vivos, whether by way of transfer, delivery, declaration of trust, or otherwise, which shall not have been bona fide made 3 years before the death". For the purposes of the above sub-section, "disposition" is defined as including "any trust, covenant, agreement or arrangement, whether made by a single operation or by associated operations".

119. Finally, however, s.10 provides that no estate duty shall be payable in respect of property situated outside Hong Kong.

The Ramsay principle

120. The argument here and below has been directed towards the application of the principle in W.T. Ramsay Limited v IRC [1982] AC 300. There is no dispute between the parties that this principle of statutory construction applies in Hong Kong. The issue is whether it applies in the circumstances of this case.

121. For my part, I find the statement of principle by Lord Brightman in Furniss (Inspector of Taxes) v Dawson [1984] AC 474 at 527 most helpful:

"First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end ... Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax-not 'no business effect'. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of taxing statute sought to be applied."

Similarly, a passage in Lord Fraser's speech in Furniss v Dawson [1984] AC 474 at 512F where, after pointing out that even if a scheme has "enduring legal consequences" the principle may still apply, he said:

"The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately."

Counsel have invited our intention to many other statements of this principle. But for the purposes of this case, I do not find it necessary to advert further to them.

122. It seems to me that it is necessary for the Court to look at what was actually done, to consider whether the steps taken in the composite transaction had any legitimate commercial (i.e. non-fiscal) purpose and then to consider what was achieved. If I dare say so, it is not inappropriate to apply some commonsense to the complicated facts and decide what was the end result and what was the purpose of the intermediary steps.

The opposing cases

123. The cases advanced by the defendant appellant and the plaintiff respondent were as they had been below. The plaintiffs contend that the deceased's dispositions were of property outside Hong Kong and therefore not chargeable to duty. They contend that the deceased sold his property in Hong Kong and then the overseas debts were released, or the proceeds of sale transferred as property outside Hong Kong.

124. The defendant on the other hand contends that the series of transactions were composite and preordained, resulting in a gift by the deceased of Hong Kong property. When the intervening transactions - which were undertaken for no business purpose - are disregarded, this is the end result and the property is chargeable to tax.

The effect of the Ramsay principle

125. The end result of the series of 21 transactions and the paper movement of money at the bank, followed by the release of the debts or transfer of the proceeds abroad (anticipated in the deceased's Manx will) was that the deceased transferred his Hong Kong property to trustees of his family abroad. The question arises whether there was any commercial or non-fiscal purpose for any of the elaborate steps taken in the course of achieving this straightforward result.

126. It is accepted that the deceased had genuine motives for wanting to transfer his property out of Hong Kong. They are referred to in the earlier judgments and I do not repeat them. As I see it, however, these motives for achieving the end result are nothing to the point. However the clear the motive may be to achieve the end result, following the Ramsay principle of construction, the court considers the purpose of the individual steps of the composite preordained arrangement. If there are no good commercial or non-fiscal purpose for that which is done, the intermediary steps fall to be disregarded and the tax statutes are applied to that end result.

Conclusion

127. If this be the proper approach - as I hold it is - then I have little hesitation in concluding that for fiscal purposes, the intermediary steps must be disregarded and the real transaction in each case was a disposition of Hong Kong property by the deceased which is chargeable to tax. I, therefore, agree with Godfrey JA that this appeal must be allowed and appropriate declarations should be made.

128. Like him also, I do not find it necessary in these circumstances to consider the alternative arguments advanced that the transactions were shams without legal effect. Similarly, and not without some relief, I do not find it necessary to deal with the submissions as to the effect of the provisions in the Ordinance upon "associated operations".

129. The consequence is that by a majority, this appeal is allowed. Appropriate declarations will be given. There will be an order nisi that the plaintiffs should pay the defendant the costs both of the appeal and below.