ASAHI IWASAWA & ASSOCIATES MANAGEMENT CONSULTANTS LTD v. SHIBAKAWA (HONG KONG) LTD

HCA 969/2014

[2021] HKCFI 2668

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 969 of 2014

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J U D G M E N T

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A. INTRODUCTION

1.  By a Notice of Appeal of 10 December 2020, as amended,[1] the Plaintiff seeks to appeal against the decision of Master Wong of 30 November 2020 (“the Decision”) whereby (inter alia) he gave leave to the Defendant to file and serve its counterclaim (“the Counterclaim”) in the form attached to its summons filed on 24 November 2020.  The Defendant’s application to file a counterclaim had originally been made by summons of 3 June 2020 (“the 3rd June 2020 Summons”). 

B.      THE BACKGROUND

2.  The Defendant retained the Plaintiff firm to provide professional accounting services.  The Plaintiff issued proceedings in 2014, claiming a sum of $5.6m-odd for two unpaid invoices.  The Statement of Claim was shortly thereafter amended, to add an additional or alternative claim on a quantum meruit basis for securing tax savings pursuant to tax-saving schemes for the Plaintiff.  It was said that the tax-saving schemes were particularised in the same two invoices as originally pleaded.

3.  In May 2020, the Plaintiff re-amended its Statement of Claim to plead that there was, additionally, an agreement that the Plaintiff would provide services to the Defendant in respect of a tax investigation carried out by the Inland Revenue Department (“the IRD”) into the Defendant’s tax affairs.  It was pleaded that the Plaintiff was to be remunerated on the basis of a success fee calculated as one-third of any tax savings secured by the Plaintiff.  The tax investigation ultimately resulted in a disallowance of certain claims for offshore profits and depreciation allowances, and a tax penalty for the Defendant.  The Plaintiff pleaded that it achieved some $17m-odd worth of tax reductions in respect of these items, and that the $5.6m-odd billed in the unpaid invoices represented approximately one-third of such reductions.

4.  In response, the Defendant amended its Defence to deny that there was any additional agreement for services to be provided in respect of the tax investigation.  It pleaded that as a result of the IRD’s tax audit, the Defendant had to pay $6,096,838 by way of additional tax due to disallowance of various deductions, and compounding penalties totaling $6,300,000.[2] It also took out the 3rd June 2020 Summons to seek leave to add a counterclaim against the Plaintiff; the proposed terms of the counterclaim were amended by summons of 24 November 2020.  In its amended form, the Counterclaim pleaded that the Plaintiff was negligent in (inter alia) failing to prepare correct tax returns for the Defendant for the years of assessment 2003/04 to 2008/09, and failing to advise the Defendant that the tax returns for the years of assessment 2001/02 to 2008/09 were wrong; such negligence resulted in the IRD issuing Notices of Revised Assessment dated 19 November 2011 for the years 2001/02 to 2008/09 and demands for compounding penalties dated 27 February 2012, and the Defendant having to pay additional tax and penalties; furthermore, the Defendant was also charged further fees by the Plaintiff in 2009 and 2010.  Apart from seeking a reimbursement of the compounding penalties of $6,230,000 and $70,000[3] demanded by the Commissioner of Inland Revenue (“the Commissioner”), the prayer in the Counterclaim also sought damages and “a full account of the time charges fees paid by the Defendant to the Plaintiff over the years from 4 June 2008 to 2011”.

C.      THE PARTIES’ CASES

5.  The Plaintiff submitted that:

(1)   the Defendant needed to leave to add a counterclaim;

(2)   leave should not be granted as the Defendant’s Counterclaim is statute-barred, even with the benefit of the operation of the doctrine of “relation-back”, and s.35 of the Limitation Ordinance, Cap. 347 (“LO”) cannot save it;

(3)   further or alternatively, leave should not be granted as the Defendant brought the Counterclaim very late.

6.  The Defendant submitted, inter alia, that:

(1)    whether leave is needed to add the Counterclaim is academic as the Defendant did apply for leave;

(2)    s.35 LO permits the addition of the Counterclaim, which is not statute-barred once the doctrine of “relation-back” is applied, as damage accrued in 2011;

(3)    alternatively, the Counterclaim is in the nature of an equitable set-off, such that it should be treated as a defence rather than a true cross-claim; s.35(2) LO therefore does not apply.   

D.      DISCUSSION

D1.    Whether leave required to add Counterclaim

7.  No real issue arises in relation to this point as the Defendant did not suggest that leave was not required; indeed the Defendant had applied for leave by the 3rd June Summons. 

8.  To the extent that the Plaintiff conflated this issue with the issue of whether s.35 LO permits the introduction of the Counterclaim, this will be addressed in the next section.

D2.    Whether Defendant’s claim in relation to years of assessment 2001/02 to 2006/07 statute-barred; application of s.35 LO

D2.1  Section 35 LO

9.  The Plaintiff accepts that the effect of the “relation back” provisions of s.35 LO is that if the Counterclaim would not have been statute-barred had it been made at the time when the Plaintiff issued its writ, then it can be introduced by amendment even though the Counterclaim would have been statute-barred by the time of the amendment[4] (subject, however, to its argument that in the present case, the Defendant made its application for amendment so late that it should be disallowed as a matter of discretion[5]).

10.  The Defendant accepts that if the Counterclaim would have been statute-barred had it been made at the time when the Plaintiff issued its writ, then s.35 LO cannot save it,[6] following Hassan Khan & Co and another v Al-Rawas [2017] 1 WLR 2301 at [31], [41] to [43]. 

11.  In the present case, the Plaintiff’s writ was issued on 4 June 2014.  Six years prior to the writ would be 4 June 2008. 

D2.2  The applicable approach to an application for amendment involving the operation of the relation-back rule in s.35(1)(b) LO

12.  The Plaintiff submitted,[7] and I agree, that the approach to be taken is governed by the test in Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd [2012] 4 HKLRD 74 at [21] to [22].  In other words, leave to amend should not be given if the effect would be to deprive a party of an accrued limitation defence, which would be lost as a result of the operation of the relation-back rule in in s.35(1)(b) LO; the correct approach is to refuse leave to amend, unless the applicant can show that the other party does not have a reasonably arguable case on limitation.[8]

13.  The Defendant did not suggest that I should take an approach to the present appeal different to that in Global Bridge Assets Ltd.

D2.3  The parties’ respective cases as to when damage occurred

14.  The Defendant has pleaded a cause of action in negligence against the Plaintiff; accordingly, its cause of action accrued when it suffered damage. 

15.  The Defendant says that it did not suffer damage until 2011, “when [the Plaintiff] paid the additional tax and penalty”.[9] (In fact, the IRD’s two actual demands for payment of $6.23m and $70,000 were not made until 27 February 2012; it is not clear when they were paid; however, the Plaintiff did propose to the IRD a payment of $6.23m by way of “compound penalty” by letter of 20 October 2011.) Counsel for the Defendant, Mr James Thomson, cited Law Society v Sephton & Co (a firm) and others [2006] 2 AC 543 in support of the submission that contingent liability was not itself damage until the contingency occurred. 

16.  The Plaintiff says that the damage complained of by the Defendant had already been suffered by this time.  A series of alternative dates were put forward by Mr Roger So, counsel for the Plaintiff, as the dates by which damage had been suffered by the Defendant in respect of claims for negligence relating to the years of assessment 2003/04 to 2006/07:[10]

(1)    the time of filing the tax return for the year of assessment in question (which were not identified);

(2)    alternatively, the dates when claims for various deductions were made (which were also not identified);

(3)    alternatively, 2007, when the IRD commenced its tax investigation against the Defendant;

(4)    alternatively, 22 January 2008, when the IRD interviewed the Defendant’s representatives;

(5)    alternatively, 29 January 2008, when Mr Sei of the Defendant is said to have admitted certain tax liabilities of the Defendant, in a letter to the Plaintiff.

17.  The Plaintiff put forward a similar series of dates in respect of the Defendant’s complaint that the Plaintiff had failed to advise the Defendant that the tax returns for the years of assessment ending 2001/02 and 2002/03 were wrong.[11]

D2.3.1        Whether damage suffered by the time of filing of tax returns

18.  The Plaintiff’s argument was that the Defendant had suffered damage in respect of any particular year of assessment as soon as the (incorrect) tax return for that year was filed, because the Defendant’s purpose in engaging the Plaintiff was to receive “the benefit of a correct tax return”.  Analogy was drawn with Pegasus Management Holdings SCA v Ernst & Young (a firm) [2009] PNLR 11[12] where Lewison J held at [107] that:

“In a case in which the purpose of engaging the professional is to secure some right or benefit for the client in connection with a contemplated transaction, and because of a failure to exercise reasonable skill and care the client does not secure that right or benefit, the cases consistently hold that the client sustains damage when the transaction takes place.”

19.  I do not consider the analogy to be apt.  In that case, accountants were engaged to advise to achieve a specific result and they advised that a particular transaction should be entered into for this purpose.  The client having embarked on the transaction, such that it was “too late to retrieve the situation” (see [111]), the damage was suffered.  The present case was not a “transaction” case where the Plaintiff had advised the Defendant to enter into a specific transaction for the purpose of achieving a particular result, only to discover that the transaction could not achieve such a result. 

20.  It was further said that by the time of the filing of the tax return (for each year of assessment), the Defendant would already have been in breach of the provisions of the Inland Revenue Ordinance (“the IRO”), thereby incurring a liability (to pay additional tax, or to be prosecuted and to pay a penalty); all that remained to be determined was the precise quantification of the additional tax or penalty.  Mr So relied on Kensland Realty Ltd v Tai, Tang & Chong (2008) 1 HKCFAR 237 at [51] and Integral Memory plc v Haines Watts [2012] EWHC 342 at [32] to [33].

21.  I do not agree.  First, insofar as the Defendant might eventually have to pay additional tax (under s.60 IRO) by reason of any understatement in the tax returns, liability to pay such tax would have arisen even if the Plaintiff had not been negligent; the Defendant was all along liable for tax on its true level of assessable profits. 

22.  Second, insofar as the Defendant might eventually have to pay a compounding penalty, I do not agree that such a liability would have arisen as at the date of the filing of a tax return for any particular year.  The Commissioner has an unfettered discretion whether or not to compound an offence: Re an application by Wong Tung-kin for Judicial Review [1989] 1 HKLR 93 at 97.  The Defendant’s liability to pay the $6.3m demanded in the IRD’s notices of 27 February 2012 would not have arisen until the Commissioner had exercised his discretion, in light of the facts as then appeared to him, to exercise his power under s.80(5) IRO and make the demands. There is nothing to suggest that the Commissioner had decided, at the time of (say) the filing of the Defendant’s tax return for 2004/05, to exercise his power of compounding offences.  As explained in the IRD’s letter of 23 April 2008 to the Defendant, the penalty aspect would not be considered by the Commissioner until after finalisation of the additional assessments (which were not issued until 2011).  Therefore, as at the date of the filing of the tax returns, the possibility that the Defendant might be asked to pay a compounding penalty was merely contingent (on the Commissioner’s exercise of discretion).  It was not the case that only an issue of quantification remained to be determined at the time of the filing of the tax returns.  A contingent liability is not damage, for the purposes of limitation, until the contingency occurs. See Law Society v Sephton & Co (a firm) and others [2006] 2 AC 543 at [30], [31], [41] and [51].

23.  The situation as at the date of the filing of the tax returns is therefore distinguishable from that in Integral Memory plc, where the claimant’s liability to pay interest on National Insurance Contributions had already been incurred as at the date when the claimant had failed properly to account to the revenue authorities for such contributions.  Since the contributions were payable, interest thereon must also have been payable; it was not a contingent liability, dependent on the occurrence of any further event.  As Deputy Judge Richard Sheldon QC said at [32]:

“The Claimant’s liability to pay interest on the unpaid NIC to HMRC was in no relevant sense contingent. A contingent liability is a liability which, by reason of something done by the person bound, may or may not arise depending on the happening of a future event…A classic example of a contingent liability is potential liability under a policy of insurance, which will only occur if an (insured) event occurs. That was not the position in the present case. There was either an actual liability to pay NIC and interest on arrears or there was not. The existence of such liability is not contingent on HMRC succeeding or failing in a tax tribunal (or a court) as submitted by Mr Khan. All the tribunal or court is deciding is whether or not there is an actual liability.”

D2.3.2        Whether damage suffered by the time of claim for deductions

24.  It is not clear how the Plaintiff’s second alternative case as to the date when damage accrued (the dates when claims for various deductions were made) is different from the Plaintiff’s case that damage accrued as at the date of filing the tax returns.  A similar analysis ought to apply to both.

D2.3.3        Whether damage suffered by the time of tax audit

25.  The IRD notified the Defendant that it was conducting an audit into its tax affairs for the years of assessment 2001/02 to 2005/06 in late 2007.  For present purposes, it suffices to refer to the IRD’s letter of 21 November 2007, formally notifying the Defendant that this was being done.

26.  It is common ground that the Defendant engaged the Plaintiff to deal with the IRD on its behalf in relation to the tax audit. It is also common ground that the Plaintiff issued to the Defendant at least the following invoices for services in dealing with the tax audit, and that the Defendant accepted that it was liable to, and did, pay them:[13]

(1)    invoice 5081 dated 31 January 2008 for $95,000;

(2)    invoice 5101 dated 14 March 2008 for $135,000;

(3)    invoice 5278 dated 15 December 2009 for $145,000;

(4)    invoice 5370 dated 29 December 2010 for $5,000 (this invoice, together with invoice 5278, will be referred to as the “2009 and 2010 Invoices”).

27.  The cost of dealing with the tax audit constituted real damage suffered by the Defendant in respect of the years of assessment covered by the tax audit.  It was real and actual damage.  See Kensland Realty Ltd v Tai, Tang & Chong (2008) 11 HKCFAR 237 at [51]:

“A cause of action in tort accrues when the damage which results from the tortious conduct is real, as distinct from minimal or negligible and is actual, as opposed to purely contingent.  The concept of “damage” is given a broad meaning.  It encompasses damage consisting of “any detriment, liability or loss capable of assessment in money terms.” Where economic loss is involved, it includes loss suffered “by payment of money, by transfer of property, by diminution in the value of an asset or by the incurring of a liability.” Whether damage has been incurred in any particular case is a question of fact.  Its precise quantification may only be possible at a later date, by which time it may have become more serious, but that does not detract from the earlier accrual of the cause of action...”

28.  Indeed, it would appear that the Defendant accepts (and asserts) that the costs of dealing with the tax audit amount to damage caused by the Plaintiff’s negligence, given that the 2009 and 2010 Invoices (relating to years of assessment subsequent to those covered in the tax audit initiated in late 2007) are pleaded as loss and damage suffered by the Defendant as a result of the Plaintiff’s negligence: see Counterclaim paragraph 33.

29.  Accordingly, in respect of the years of assessment covered by the tax audit (2001/02 to 2005/06), the Defendant’s cause of action would have accrued latest by 31 January 2008, when the Defendant incurred costs – ironically, payable to the Plaintiff – in dealing with the tax audit.  This is so notwithstanding the fact that the Defendant’s damage was to become more serious later, culminating in the demands for compounding penalties.

30.  Since the Defendant’s cause of action for the years of assessment up to 2005/06 accrued prior to 4 June 2008, the causes of action against the Plaintiff in relation to 2001/02, 2002/03, 2003/04, 2004/05 and 2005/06 as claimed in the Counterclaim would be time-barred insofar as they are relied upon as independent claims.  I will return below to the question of whether the Defendant can nevertheless rely upon these claims by way of defence.

31.  The fact that the Defendant has not pleaded the first and second invoices (which predate 4 June 2008) does not enable it to defeat the statute of limitations: see Polley v Warner Goodman & Street (a firm) [2003] PNLR 40 at [15].

D2.3.4        The year of assessment 2006/07

32.  Mr So submitted that the Defendant’s claim in respect of the year of assessment 2006/07 also accrued on one of the five alternative dates given above in paragraph 16.  I have explained why I do not consider that any damage occurred on the first two dates.  As for damage in the form of costs (invoiced in January and March 2008) arising from the tax audit, this would not have applied to the year of assessment 2006/07, as the tax audit initiated in late 2007 was stated to cover the years of assessment up to 2005/06 only.

33.  The fourth alternative date relied on by Mr So was 22 January 2008, when the IRD interviewed the Defendant’s representatives.  However, notwithstanding that the notes of the interview refer briefly to 2006/07, the interview related to the tax audit for the years of assessment 2001/02 to 2005/06 (and indeed had been referred to as the initial interview for the purpose of that audit in the IRD’s letter of 21 November 2007).

34.  The fifth alternative date relied on by Mr So was 29 January 2008, when Mr Sei of the Defendant is said to have admitted certain tax liabilities of the Defendant, in a letter to the Plaintiff.  However, that letter again related to the tax audit for the years of assessment 2001/02 to 2005/06.  In any event, even if the Defendant had indicated in the letter that it would make certain concessions to the IRD, I do not see how this sheds light on the question of whether damage caused by the Plaintiff’s negligence had occurred by this date.

35.  No reasonable argument on limitation has therefore been advanced in respect of the Defendant’s cause of action in relation to the year of assessment 2006/07.

D3.    Whether Counterclaim in the nature of an equitable set-off, such that s.35 LO not apply

36.  The Defendant submitted that the Counterclaim is in the nature of an equitable set-off, such that it should be treated as a defence rather than a true cross-claim, and s.35(2) LO therefore does not apply.

37.  The Defendant relied on Delco Participation BV v Chiho Environmental Group Ltd [2020] 5 HKLRD 712, where Kwan VP held as follows.

“28.  ...  Where an amendment to plead an arguably time-barred claim would bring the “relation back rule” in s.35(1)(b) into operation, the amendment could deprive a party of an arguable limitation defence and so prejudice it.  The correct approach is to refuse leave to amend, unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation …

29.    Section 35(2) defines a new claim as meaning “any claim by way of set-off or counterclaim, and any claim involving either – (a) the addition or substitution of a new cause of action; or (b) the addition or substitution of a new party”.

30.    There is no dispute that “set-off” in this context means legal set-off, as opposed to equitable set-off, as a matter of construction of the wording of the statutory provision and as a matter of principle (Henriksens Rederi A/S v CHZ Rolitripex [1974] QB 233, 246C; Westdeutsche Landesbank v Islington LBC [1994] 4 All ER 890, 945b-f). 

31.    As explained by Hobhouse J in Westdeutsche Landesbank at pp.943f-946a, “any claim” as a matter of language contemplates something which is, or can be expressed as, a “claim”, not something which has a mere status as a defence.  If a plaintiff, in equity, is not entitled to assert his cause of action without at the same time giving credit to the defendant for the relevant matters, no question of any claim being made by a defendant against the plaintiff arises, and the sole question is what is the proper claim that the plaintiff should make against the defendant.

32.    The rationale for this was as stated by Lord Denning MR in Henriksens at p.245G-H:

In point of principle, when applying the law of limitation, a distinction must be drawn between a matter which is in the nature of a defence and one which is in the nature of a cross-claim.  When a defendant is sued, he can raise any matter which is properly in the nature of a defence, without fear of being met by a period of limitation.  No defence, properly so called, is subject to a time-bar. But the defendant cannot raise a matter which is properly the subject of a cross-claim, except within the period of limitation allowed for such a claim.  A cross-claim may be made in a separate action, or it may be made by way of set off or counterclaim.  But on principle it is always subject to a time-bar.

33.    A legal set-off, as denoted by the word “set-off” in s.35(2), is not properly in the nature of a defence.  It is a purely procedural defence which does not operate to reduce or extinguish the creditor’s claim except at the point where judgment is given for the balance.  It does not affect the substantive rights of the parties against each other, until both causes of action have been merged in a judgment of the court.  It addresses questions of procedure and case flow.  As a matter of procedure, it enables a defendant to require his cross-claim be tried together with the plaintiff's claim instead of having to be the subject of a separate action and in this way ensures that judgment will be given simultaneously on the claim and cross-claim. Although both the claim and cross-claim must be liquidated, it is not necessary that the claim and cross-claim should be connected to each other (Goode & Gullifer on Legal Problems of Credit and Security (6th ed.) at para.7-04; Stein v Blake [1996] AC 243, 251; Fearns v Anglo-Dutch Paint & Chemical Co Ltd [2011] 1 WLR 366, [13]-[15]).

34.    In contrast, an equitable or transaction set-off, which does not fall within s.35(2), is properly in the nature of a defence.  It arises where the claim and cross-claim, even if not arising from the same transaction, are so closely connected that it would be inequitable for one claim to be enforced without credit being given for the other.  It is capable of operating as a substantive defence where this is not precluded by the nature or terms of a contract between the parties.  It can be relied on outside the context of proceedings as an immediate answer to a liability to pay money otherwise due…”

38.  In Henriksens Rederi A/S v THZ Rolimpex (The Brede) [1974] 1 QB 233 at 245F-249A, Lord Denning MR set out a detailed analysis of the meaning of “set-off” and “counterclaim” in the context of s.28 Limitation Act 1939 (the equivalent of s.35(1) LO).  At 249B, he concluded:

“Such being the general principles, I think that when a contractor agrees to perform services for a fixed or ascertainable sum and, nevertheless, by his negligence in performing those services, causes loss or damage to the employer, then when the contractor sues for the agreed price, the employer can set up the loss or damage in diminution or extinction of the price. Such setting up is [a] matter of defence, legal or equitable, and is not subject to a time-bar. It is not barred by the statute of limitation, so long as the main action itself is timely.”

39.  In the present case, paragraphs 14 to 17 of the Amended Defence plead that as a result of the IRD’s tax audit, the Defendant had to pay an additional $6,096,838 by way of tax, and $6,300,000 by way of compounding penalties.  Accordingly (says the Defendant), the Plaintiff was not, in fact, successful in saving the Defendant tax.  On the contrary, the Defendant’s reliance on the Plaintiff had caused it to be liable for additional tax and compounding penalties. 

40.  In paragraph 18, the Defendant pleads that the failure of the Plaintiff to justify to the IRD the tax deductions claimed on the Defendant’s behalf should be taken into account in assessing the Plaintiff’s alleged tax-saving services, and that overall, there was no tax saving achieved.  Whilst the Defendant did not expressly refer to compounding penalties in paragraph 18, the context of the paragraph and its reference to paragraphs 14 to 17 indicate a reliance on both the additional tax and the compounding penalties as matters to be taken into account in assessing the amounts claimed by the Plaintiff.  (There is however no reference to the 2009 and 2010 Invoices as being matters which should be taken into account in this manner.)

41.  In my view, whilst the Defendant has pleaded an entitlement to various types of relief in the Counterclaim, the substance of the Amended Defence and the Counterclaim, taken together, is that the Plaintiff’s claim to have successfully reduced the Defendant’s tax liabilities needs to be assessed in the light of all the additional payments which the Defendant has had to pay as a result of the Plaintiff’s alleged negligence.  Even if the Plaintiff establishes that there was an agreement that it would be paid a portion of the fees of the “success” it achieved for the Defendant, there will be a question as to the extent of its “success”.  The Plaintiff says that it achieved sufficient “success” so as to be entitled to the fees claimed.  The matters pleaded in the Amended Defence and the proposed Counterclaim are intimately bound up with this issue, such that it would be unjust to exclude them from consideration when adjudicating on the Plaintiff’s claim.  That being the case, the Counterclaim raises a defence to the Plaintiff’s claim rather than an independent cross-claim: cf.  Delco at [39], [45].  See also Filross Securities Limited v Midgeley (1998) 31 HLR 465.

42.  Mr So argued that the Plaintiff’s claim was not sufficiently connected to the Defendant’s Counterclaim as the Plaintiff’s claim was for fees for dealing with a tax audit and negotiations with the IRD from 2008, whereas the Defendant was claiming for negligence which had happened in relation to the preparation of tax returns going as far back as 2002.  However, the tax audit was precisely to investigate tax returns prepared by the Plaintiff from 2001/02 to 2005/06; it is the Defendant’s case that these were prepared negligently, so that any “success” in mitigating the additional tax and compounding penalty on completion of the audit should not be considered in isolation from the Plaintiff’s responsibility for causing the Defendant to be charged with the additional tax and compound penalties in the first place.  I agree that it would not be just for the Plaintiff’s claim for a success fee to be considered without regard to matters which would go to the question of how successful the Plaintiff actually was.

43.  Mr So further argued that the compounding penalty of $70,000 was imposed for the Defendant’s failure to keep proper business records and that this had nothing to do with the alleged negligence as pleaded by the Defendant.[14] However, paragraph 27g of the Counterclaim pleads the Plaintiff’s failure to advise the Defendant as to its obligations of record keeping.

44.  My view that the Counterclaim raises a defence to the Plaintiff’s claim is subject to one qualification.  Apart from reimbursement for the amount paid by way of compounding penalties, the Counterclaim also seeks (1) damages for negligence (which would appear to include the amounts paid pursuant to the 2009 and 2010 Invoices) and (2) an account of various fees paid by the Defendant to the Plaintiff between 4 June 2008 to 2011.  As the Amended Defence currently does not seek to set off these amounts against the amount (if any) which may be found due to the Plaintiff, they are not properly the subject of a defence of set-off.  As regards (1), I would note that the Plaintiff accepts that the claim for reimbursement of the 2009 and 2010 Invoices could in fact be pleaded as a defence of equitable set-off.[15]In any event, for both (1) and (2), although they are not currently pleaded as a set-off, they can nevertheless stand as independent cross-claims since no issue of limitation arises for the period in question.

45.  Subject to this qualification, I accept the Defendant’s submission that the Counterclaim is not subject to s.35 LO.  This means, inter alia, that the Defendant is not barred from pursuing its complaint of negligence in respect of the years of assessment 2001/02 to 2005/06, notwithstanding paragraph 30 above. 

D4.    Whether leave for Counterclaim regarding later years of assessment should be refused by reason of delay

46.  The Plaintiff’s case regarding the Defendant’s counterclaim for negligence relating to the years of assessment 2007/08 and 2008/09 was that leave should not be given to include them in the Counterclaim as they were raised too late.[16] The submission was that whilst the operation of the doctrine of relation back under s.35 LO was such as to bring the claims within the limitation period, the reality was that the claims were stale.  It was said that damage was suffered as soon as the tax returns for those years of assessment were filed, so that the causes of action would have accrued over a decade before the application to add the Counterclaim was made in 2020.

47.  I have above rejected the submission that damage arising from the alleged negligence should be taken as having occurred on the filing of the tax returns.  It is not necessary to determine definitively when damage first arose for the years of assessment 2007/08 and 2008/09; it suffices for present purposes to note that it must have occurred latest by 27 February 2012, when the Defendant was asked to pay the compounding penalties for the years of assessment 2004/05 to 2008/09.  This was over eight years before the Defendant’s application to add the Counterclaim was first made in June 2020.

48.  Mr So submitted that s.35 LO “does not give the [Defendant] an unrestricted permit for raising a counterclaim (albeit an original counterclaim) via amendment no matter how stale and how late it is made”.[17] He sought to rely on Hassan Khan & Co at [38] where Sharp LJ said “…it is difficult to discern any intelligible legislative policy behind a provision which would enable a counterclaim of any age, and no matter how stale, to be pursued, merely because, as a matter of happenstance, the party raising such a new claim, had been sued…”

49.  However, as Mr So acknowledged, Sharp LJ’s observation was in the context of his rejection of a submission that a counterclaim could be made notwithstanding that it would be time-barred as at the date of the original writ.  It therefore does not support the submission made.

50.  Insofar as Mr So was seeking to argue that, as a matter of construction, s.35 LO does not permit the making of counterclaims which are “stale” even though, by reason of the doctrine of relation back, they are treated as having been made within time, I do not agree.  The wording of s.35(3) LO is clear on this point.  As Sharp LJ observed in Hassan Khan & Co at [31], s.35 (of the Limitation Act) gives an original counterclaim the benefit of the doctrine of relation back (but no greater benefit).

51.  Insofar as Mr So was seeking to argue that although s.35 LO technically permits the introduction of such stale counterclaims, the Court should exercise its discretion to nevertheless disallow them for staleness alone, I do not agree.  As Lord Walker said in Roberts v Gill & Co [2011] 1 AC 240 at 99, “…In cases where the amendment was not prohibited [by s.35 of the Limitation Act], the court retained its traditional discretion whether or not to permit an amendment, that discretion being exercisable by reference to what was just…”.  In other words, whether or not leave should be granted should be determined by the usual principles applicable on an application for amendment of pleadings.

52.  In Ketteman and others v Hansel Properties Ltd and others [1987] AC 189 at 212F to H, Lord Brandon said:

“First, all such amendments should be made as are necessary to enable the real questions in controversy between the parties to be decided. Secondly, amendments should not be refused solely because they have been made necessary by the honest fault or mistake of the party applying for leave to make them: it is not the function of the court to punish parties for mistakes which they have made in the conduct of their cases by deciding otherwise than in accordance with their rights. Thirdly, however blameworthy (short of bad faith) may have been a party’s failure to plead the subject matter of a proposed amendment earlier, and however late the application for leave to make such amendment may have been, the application should, in general, be allowed, provided that allowing it will not prejudice the other party. Fourthly, there is no injustice to the other party if he can be compensated by appropriate orders as to costs.”

53.  In Topwell Corp Ltd v Kwan Kam Kee [2014] 5 HKLRD 1 at [39], Kwan JA said:

“The principles in Ketteman v Hansel Properties Ltd [1987] AC 189 at 212F-H on the exercise of discretion to allow or refuse an amendment of pleadings remain good law after the CJR ... Having said that, in the exercise of discretion, the Court must of course have regard to the underlying objectives in O.1A of the RHC or of the RDC, so it cannot be assumed that once the principles in Ketteman are satisfied, the amendment would be allowed. The Court would need to balance all relevant factors to decide how its discretion should be exercised, if the application is made in circumstances offending one or more of the underlying objectives…”

54.  I also bear in mind that in giving effect to the underlying objectives of the RHC, “the Court shall always recognise that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties”: RHC O.1A r.2(2).

55.  The Plaintiff complained that no good reasons were put forward for the delay in raising the Counterclaim.  However, the Defendant explained that the pleading of the Counterclaim was prompted by the Plaintiff’s Re-Amended Statement of Claim.

(1)    The Defendant sought to raise its Counterclaim upon the Plaintiff’s extensive re-amendment of the Statement of Claim, for which leave was granted on 4 May 2020.  The Re-Amended Statement of Claim pleaded an oral agreement regarding the Plaintiff’s provision of services in handling a tax investigation, for which it was to be remunerated on the basis of a success fee of one-third of any tax savings secured by the Plaintiff.  (Whilst this alleged agreement had been alluded to in earlier affirmations in the Plaintiff’s application for summary judgment, it had not been pleaded.) Prior to that, the Amended Statement of Claim of June 2014 had made a simple claim for payment of two unpaid invoices, and a claim for a quantum meruit in the alternative for services for “securing tax saving” and “implementing tax saving schemes as particularized in the invoices”.

(2)    It is the Defendant’s case that there was neither an agreement about a success fee, nor success by any reasonable measure; it sought to introduce the Counterclaim in response to the new matters pleaded in the Re-Amended Statement of Claim, and to claim for the loss caused (as opposed to the success achieved) by the Plaintiff.[18]

(3)    The Defendant said that it had originally contemplated simply striking out the Plaintiff’s claim (prior to the re-amendment) rather than incurring the time and costs of adding a counterclaim, and only sought to take a more “aggressive” stance after the Plaintiff adopted what it (the Defendant) considered to be a misleading stance (in asserting that it had achieved success when in fact it had achieved failure). 

56.  There is no suggestion that the Defendant deliberately delayed the introduction of its Counterclaim in order to gain some tactical advantage.  Rather, it seems to me that the new matters pleaded in the Amended Defence respond to the Plaintiff’s new claim of an oral agreement for a success fee, alleging (inter alia) that the Plaintiff mishandled the Defendant’s tax filings, and that the Counterclaim follows from such allegations.

57.  In any event, as regards that part of the Counterclaim which, in my view, constitutes an equitable set-off not subject to s.35 LO, the Plaintiff’s argument as to staleness (in cases where s.35 LO applies) must fail given that s.35 LO does not apply.  No argument as to laches or s.36 LO was advanced.

58.  Aside from delay, the Plaintiff also says that it would be prejudiced by the introduction of the Counterclaim, as the 3rd June 2020 Summons was taken out only four years after the death on 12 September 2016 of Mr Isoo Iwasawa, a former director of the Plaintiff who had first-hand knowledge of the dealings with the Defendant.  Reference was made to the 6th Affirmation of Lau Siu Hung (one of the joint and several liquidators of the Plaintiff), which in turn referred to the 2nd Affirmation of Isoo Iwasawa of 8 August 2014, where Mr Isoo had alleged that the Defendant had agreed to pay a success fee based on a third of tax savings achieved.  In response, the Defendant had filed the Affirmation of Naito Kanenori of 8 September 2014, in which he said that there was never any agreement as alleged (see paragraphs 16, 35, 41, 42).  Yet the Plaintiff did not take any steps to re-amend its Statement of Claim to plead the alleged success fee agreement until 12 November 2019, well after the death of Mr Isoo.  In the circumstances, the Defendant cannot be criticised for not pleading a denial of the agreement until its Amended Defence; the denial of the agreement in the Counterclaim simply follows on from this.

59.  Paragraph 44 of the 6th Affirmation of Lau Siu Hung further claims that “the Plaintiff is deprived of the right to provide any information and / or documents showing that, among others, how and when the Defendant had provided the information and / or documents instructed [sic] the Plaintiff to submit the claims of the said “deductions” to IRD in the relevant years of assessment”.  It appears that this is a reference to (inter alia) the instructions given by the Defendant to the Plaintiff in a letter of 29 January 2008 to take an “aggressive approach” (see paragraphs 41 to 43 of the 6th Affirmation of Lau Siu Hung).  Again, this letter was only pleaded by the Plaintiff in its Re-Amended Statement of Claim.  Similarly, therefore, the Defendant cannot be criticised for not dealing with it until its Amended Defence and Counterclaim. 

60.  No date for trial has yet been fixed, so that the introduction of the Counterclaim does not affect such a date. 

61.  In all the circumstances, it seems to me to be just that the Defendant should have leave to re-amend its Defence to add the Counterclaim, subject to it being properly formatted.[19]

E.      CONCLUSION

62.  I therefore dismiss the appeal.  The Defendant will have leave to file and serve its Counterclaim, subject to it being properly formatted.   

63.  I further make a costs order nisi that the costs of and occasioned by the appeal should be to the Defendant, with certificate for (one) counsel.

[1]  The parties were agreed that leave to amend the Notice of Appeal as sought in the Plaintiff’s summons of 14 January 2021 should be granted on terms that the Plaintiff pay the costs of and occasioned by the amendment, and I granted leave accordingly. 

[2]  More precisely, the amounts demanded were in exchange for the exercise by the Commissioner of Inland Revenue of his power to compound offences under s.80(5) of the Inland Revenue Ordinance, Cap.112.

[3]  But not the payment of the additional tax, which counsel for the Defendant indicated at the hearing were properly payable by the Defendant.

[4]  Plaintiff’s skeleton paragraph 40(3) (p.32), paragraph 57 (p.38).

[5]  Plaintiff’s skeleton paragraph 38(2)(b) (p.30), paragraph 106 (p.60).

[6]  Defendant’s skeleton paragraph 34.

[7]  Plaintiff’s skeleton appendix A paragraph 1 (p.65).

[8]  Or that the new claim arises out of the same or substantially the same facts as a cause of action in respect of which relief has already been claimed (by the applicant) in the existing action (which does not apply in the present case).

[9]  Defendant’s skeleton paragraph 11.

[10]   Plaintiff’s skeleton paragraph 94 (p.55), clarified at the hearing to be restricted to 2003/04 to 2006/07.

[11]   Omitting however the time of filing of the tax returns, which the Defendant had pleaded were prepared by others. See Plaintiff’s skeleton paragraphs 97 to 98 (p.56).

[12]   Appeal dismissed [2010] PNLR 23; see [80] to [84].

[13]   Affirmation of Naito Kanenori for the Defendant, paragraph 10; 2nd Affirmation of Isoo Iwasawa for the Plaintiff, paragraphs 18, 22(i).

[14]   Plaintiff’s skeleton paragraph 103 (p.58).

[15]   Plaintiff’s skeleton paragraph 102 (p.58).

[16]   Plaintiff’s skeleton paragraphs 38(2)(b) (p.30), 59(2) (p.39) and 105 (p.60).  Whilst the Plaintiff did not raise this argument in relation to the year of assessment 2006/07, logically, the same analysis ought to apply.

[17]   Plaintiff’s skeleton paragraph 70 (p.44).

[18]   6th Affirmation of Komaki Masayohsi, paragraphs 4, 7.

[19]   No explanation was given as to why the Counterclaim and references thereto, which would constitute a re-amendment to the Amended Defence, were confusingly not underlined in green, despite amendments in the earlier part of the document (the Amended Defence) being underlined in red.