XCHRX COMMISSIONER OF INLAND REVENUE v. POINTSTYLE INVESTMENT LTD. AND OTHERS

HCA 13008/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13008 OF 1996

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J U D G M E N T

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1. This is an appeal by D2 and D3 against the order of Master S Kwan dated 13 October 1999 whereby she ordered that:-

(a) judgment be entered against D2 and D3 in the respective sums of $8,636,511.82 and $3,111,478.45 upon their own admission under para. 34 of the Amended Defence and Counterclaim with interest;

(b) costs of the Plaintiff's application for judgment on admission be to the Plaintiff with certificate for counsel;

(c) D2 and D3's application for stay of the proceedings herein pending the determination of their objection under S. 70A of the Inland Revenue Ordinance be dismissed with costs to the Plaintiff in any event.

D2 and D3 ask for the said order to be set aside and orders to the reverse to be granted in this appeal. During the hearing of this appeal, Mr Chan for D2 and D3 informs me that he is not pursuing the appeal relating to the dismissal of the Defendants' stay application. That part of the appeal is therefore dismissed.

2. The Plaintiff brings this action against D1 to D3 for profits tax which was said to be payable by the Defendants under a written guarantee dated 15 June 1995.

3. It is part of the Plaintiff's case that a Foo Yu Enterprises Ltd ("Foo Yu") was primarily liable for paying this tax: see para. 4 of the Statement of Claim. It is the Plaintiff's claim herein that the Defendants had incurred personal liability to do so arose out of the said guarantee.

4. Para. 34 of the Amended Defence relied upon by the Plaintiff in its earlier application reads:-

"[D2] and [D3] were at all material times and still are ready willing and able to respectively pay to [the Plaintiff] or contribute 37% and 13.33% of the sum claimed by [the Plaintiff] which are respectively and [the sums are set out] ..."

5. It was the Plaintiff's argument, which the learned Master must have accepted, that this paragraph amounted to a "clear and unambiguous" admission as to the personal liability of D2 (to the extent of 37% of the overall claim herein) and of D3 (to the extent of 13.33% of the overall claim herein).

6. Mr Chan and Mr Liu for D2 and D3 (who did not draft the pleading of D2 and D3) submit that there are in fact 2 lines of defence:-

(a) D2 and D3 signed the Guarantee only:-

(1) for and on behalf of D1 as the guarantor;

(2) for and on behalf of Foo Yu as the debtor.

They never signed the Guarantee in their personal capacity or intended to incur personal capacity for the Plaintiff's claim ("the primary defence").

(b) If D2 and D3 had incurred personal liability for the Plaintiff's claim, their respective liability should be limited to 37% and 13.33% by reason of their respective percentages of shareholding in D1 ("the alternative defence").

Further to these 2 lines of defence, Mr Chan also relies in his written submissions on the defence under S. 70A of the Inland Revenue Ordinance but he did not pursue this line of defence at the hearing of the appeal.

7. Mr Chan argues that the primary defence can be found in paras 16, 19, 21 and 40(3) (which should be para. (3) of the prayer for relief of the Counterclaim) of the Amended Defence. During the hearing of this appeal, Mr Chan also relies on paras 18 and 20 of the Amended Defence. He further argues that the alternative defence can be found in paras 13, 14, 23, 31, 32 and 40(2) (which should be para. (2) of the prayer for relief of the Counterclaim) thereof. Mr Chan fairly accepts that the Amended Defence did not expressly put these 2 lines of defence in the alternative.

8. I have great sympathy for the learned Master in concluding the way she did in relation to the Plaintiff's application. Not only did the defence pleading fail to expressly put the 2 lines of defence in the alternative, it was drafted in a way which is convoluted, chaotic and misleading. If the 2 lines of defence had not been pointed out by Mr Chan, it would have been reasonable for a reader to conclude that only 1 line of defence was relied upon, that is, the alternative defence.

9. First, as can be seen from the paragraph numbers highlighted by Mr Chan as relevant to the primary defence and alternative defence respectively, they have not been grouped together one after the other in 2 distinct groups (as they should have been) or in logical sequence. Further, in various parts of the Amended Defence, the pleader has in fact used phrases which prompt one to conclude that D2 and D3 only rely on the alternative defence, namely, that although they are personally liable, their respective liability should be 37% and 13.33% of the overall claim. These phrases include the following:-

(a) "... [D3] on behalf of himself and the other Defendants by Counterclaim agreed with [D2] that the beneficial shareholders of [D1] should be responsible to pay to [the Plaintiff] their respective shares of tax payable to [the Plaintiff] in the same proportion as their respective beneficial shareholding in [D1] ..." (para. 11 of the Amended Defence) (underline supplied);

(b) "It was expressly made known to Mr Kwok [Foo Yu's auditor] ... that any settlement to be reached with [the Plaintiff] to pay any of the sums claims whether by instalments or otherwise would be paid or contributed to by the beneficial shareholders of [D1] ..." (para. 13 of the Amended Defence) (underline supplied);

(c) "The guarantee was sent by Mr Kwok to [D2] and [D3] for their signatures, who signed it with the intention and understanding, ... his liable [sic] to [the Plaintiff] in respect of the instalment payments was limited to 37% and 13.33% respectively ..." (para. 23 of the Amended Defence) (underline supplied);

(d) "Ms Tsoi was informed by Mr Kwok that [D2] and [D3] refuse to be bound 'jointly and severally' to pay [the Plaintiff] in respect of the instalment payments and they were only prepared to pay or contribute 37% and 13.33% respectively ... as were their share of liability." (para. 27 of the Amended Defence) (underline supplied);

(e) "... the Guarantee was intended to embody the Shareholders Agreement made between the beneficial shareholders of [D1] ..." (para. 28 of the Amended Defence) (underline supplied);

(f) "[D2] and [D3] signed the Guarantee in the belief that it embodied the Shareholders Agreement ..." (para. 30 of the Amended Defence) (underline supplied).

10. Having said so, the outcome of the Plaintiff's application does not depend on how well (or poorly) the pleading has been drafted, but on whether an "admission" (if any) has "clearly and unambiguously" been made. This question will have to be answered after the whole pleading has been considered. Mr Smith for the Plaintiff also agrees with that approach.

11. One part of the Amended Defence relied upon by Mr Chan in support of his contention that there was a primary defence includes paras 20 and 21 thereof which read:

"... Mr Kwok, purporting to incorporate the terms of the Shareholder Agreement ... retyped the standard letter, but besides the name of [D1], mistakenly included the names of [D2] and [D3] as guarantors without qualifying them as being inserted in their capacity as directors for and on behalf of Foo Yu" (underline supplied);

"Mr Kwok further on the second page left blank for the signatures guarantors, inserted the names of [D1], [D2] and [D3] but had inadvertently omitted to indicate that [D2] and [D3] only signed as directors for and on behalf of Foo Yu ..." (underline supplied).

12. Mr Smith for the Plaintiff submitted that if one takes into account what was being pleaded in the other parts of the Amended Defence, the averments in paras 20 and 21 were only made to put forward the so-called "alternative defence". This, he argues, is because D2 and D3 somehow thought that their personal liability would be limited if their capacity as directors of Foo Yu had been clearly set out. That may well be the case. It may also well be the case that the so-called "primary defence" is inherently implausible, or unbelievable (and I do not say for the propose of this appeal whether such is in fact the case), but the issue in this appeal is whether or not a "clear and unambiguous" admission has been made in para. 34 of the Amended Defence.

13. While Mr Smith may be correct in his analysis of the purpose of the averments made in paras 20 and 21 of the Amended Defence, I do not find it clear and unambiguous that they do not intend to put forward the so-called "primary defence" contended for by Mr Chan. I therefore agree with Mr Chan that those paragraphs of the Amended Defence relied on by him show that no clear and unambiguous admission has in fact been made. This is because such an "admission" would be inconsistent with the primary defence.

14. For the above reasons, I conclude that the Plaintiff's application should be dismissed. The appeal should be allowed (and the learned Master's order set aside) to that extent.