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CACV 64/2011
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL
CIVIL APPEAL NO 64 OF 2011
(ON APPEAL FROM HCAL NO 29 OF 2010)
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IN THE MATTER of decisions made under s. 64, s. 66 and s. 70A of the Inland Revenue Ordinance
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AND
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IN THE MATTER of the Inland Revenue Ordinance, Cap. 112
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BETWEEN
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MOULIN GLOBAL EYECARE TRADING LIMITED (IN LIQUIDATION) (formerly known as MOULIN OPTICAL MANUFACTORY LIMITED) |
Applicant |
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and
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THE COMMISSIONER OF INLAND REVENUE |
1st Respondent |
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THE INLAND REVENUE BOARD OF REVIEW |
2nd Respondent |
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Before: Hon Kwan, Fok JJA and Lam J in Court
Dates of Hearing: 2 and 3 February 2012
Date of Judgment: 21 March 2012
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JUDGMENT
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Hon Kwan JA:
1. This is an appeal of the Commissioner of Inland Revenue (“the Commissioner”) from the judgment of Reyes J on 15 February 2011 in an application for judicial review brought by the liquidators of Moulin Global Eyecare Trading Limited (“MGET”). The Commissioner was the 1st respondent to the proceedings. The liquidators did not pursue their claim for relief against the 2nd respondent, the Inland Revenue Board of Review, and the Board took no part in this appeal.
2. By his judgment, Reyes J quashed the decisions of the Commissioner in which she refused to exercise the power under section 64 of the Inland Revenue Ordinance, Cap 112 (“the Ordinance”) to extend time for the liquidators to object to MGET’s profits tax assessments from 1998/99 to 2003/04 and refused to exercise the power under section 70A of the Ordinance to revise MGET’s tax assessment in respect of the year 2003/04. He ordered that the liquidators’ application for extension of time under section 64 and for revision of the assessment of 2003/04 be remitted to the Commissioner for reconsideration in the light of his judgment. He made a further declaration that the liquidators are not barred from challenging the profits tax assessments underlying the Commissioner’s proof of debt lodged in the winding up of MGET by way of the procedures in the Ordinance or by way of judicial review.
3. The Commissioner did not pursue her appeal regarding the declaration, which followed on the judge’s conclusion that res judicata does not apply to bar the liquidators from challenging the assessments underlying the Commissioner’s proof of debt by recourse to the procedures in sections 64 and 70A. The key issue in this appeal is whether the taxpayer, by its liquidators, may re-open its tax assessments years later on the ground that its controlling directors at the time the tax returns were filed had fraudulently inflated its profits for the purpose of defrauding its bankers and other creditors. This raises the question whether MGET is bound by the knowledge of its fraudulent directors.
The background
4. The relevant background matters, taken largely from the judgment below, may first be stated as follows.
5. MGET was the largest operating subsidiary of a multinational enterprise known as the Moulin group. Its ultimate parent company, Moulin Global Eyecare Holdings Limited (“Holdings”), was a listed company in Hong Kong. At all material times, the Ma family, including the group chairman and founder Ma Bo Kee and his son Cary Ma, controlled a substantial block of shares in Holdings. Provisional liquidators were appointed for MGET on 23 June 2005 and Holdings and MGET were ordered to be wound up on 5 June 2006. Given the size of the group’s operations and the complexity of the issues involved, the winding up of the Moulin group has been characterised as one of the most complex liquidations in Hong Kong.
6. The liquidators discovered serious anomalies in MGET’s accounts. In particular, they found that Ma Bo Kee, his sister-in-law the group treasurer Michelle Lam and the group chief executive officer Cary Ma (collectively “the Ma Directors”) had falsified MGET’s accounts in a massive way through the creation of fictitious sales. They had inflated MGET’s profits with false sales records, giving its creditors and the investing public a false view of the financial health of the group. In February 2009, criminal charges were laid against Ma Bo Kee, Michelle Lam, Cary Ma and others arising out of the falsification of MGET’s profits and the obtaining of trade finance on false premises to provide funding for MGET’s business. Michelle Lam and Cary Ma pleaded guilty in late 2010 and Ma Bo Kee was found guilty after trial. In sentencing them to imprisonment ranging from 9.5 to 12 years, Line J mentioned that creditor banks were owed $2.7 billion and investors $1.75 billion and described their conduct as “commercial crime of the worst kind”.
7. In consequence of the falsification of MGET’s profits, the Ma Directors had caused profits tax returns to be submitted to the Commissioner based on the accounts of MGET approved by its board of directors. MGET was assessed by the Commissioner for profits tax totalling $88,972,757 in the years of 1998/99 to 2003/04. It was found by the liquidators that after reversing the false sales in the accounts, MGET had made substantial losses in each of the relevant years and had made no profit in the tax years from 1998/99 onwards. To the liquidators, this meant that in the years of 1998/99 to 2003/04, MGET had been wrongly assessed for and had wrongly paid profits tax of nearly $89 million.
8. Subsequent to the appointment of provisional liquidators and in August and November 2005, the Commissioner issued additional and estimated assessments to MGET in respect of the years 1999/2000, 2001/02, 2002/03, 2004/05 and 2005/06 for profits tax of $10,363,532. The estimated assessments were raised pursuant to the Commissioner’s power under section 59(3) of the Ordinance to make assessments in the absence of returns from a person thought to be chargeable to tax, as no tax returns were filed for MGET in respect of 2004/05 and 2005/06. The tax assessed in the additional and estimated assessments has not been paid and is the subject of the proof of debt filed by the Commissioner in MGET’s liquidation on 15 August 2006.
The Commissioner’s decisions
9. The liquidators entered into protracted correspondence with the Commissioner with the objective of securing a refund of the profits tax which they contend MGET had wrongly paid. Some of these letters contained the decisions of the Commissioner which formed the subject of the judicial review. As Reyes J had held that the two earlier “decisions” do not amount to reviewable decisions and there is no appeal from this finding, it is not necessary to mention the earlier correspondence.
10. The first relevant letter was the liquidators’ letter to the Commissioner dated 13 November 2009 in which the liquidators “formally object pursuant to s 64(1)(a) of the Ordinance to the assessments for the Years of Assessment [from 1998/99 to 2002/03, as defined in the letter] upon the ground that [MGET] made no assessable profits in each of those years.” The liquidators subsequently stated there was a clerical error here in that the “Years of Assessment” should be taken to refer to 1998/99 to 2003/04. Nothing turns on this.
11. In this letter, the liquidators stated that by reason of the conduct of the former directors, their frauds on the company were concealed, and that had prevented MGET from giving notice of objection within one month after the date of the notices of assessment for “the Years of Assessment”, as required under section 64(1). (I pause here to note that the last of the notices of assessment was given on 29 August 2005, so the notice of objection on 13 November 2009 was well outside the one-month limit in section 64.) Accordingly, they requested the Commissioner to consider their notice of objection to the notices of assessment for “the Years of Assessment” and to determine it pursuant to section 64(2) as a valid notice of objection. They also “formally” claimed repayment of the total sum of $91,770,791 in respect of the tax paid for “the Years of Assessment”, based on section 70A and restitution at common law. The evidence they relied on was the 10th affidavit of one of the liquidators in which he described the major aspects that MGET’s accounts had been falsified and the model prepared by the liquidators which reversed the effect of the false sales to five major North American customers, showing that MGET had made substantial losses between 1998/99 and 2004/05.
12. The Commissioner replied by the letter of the Department of Justice dated 4 December 2009. This was referred to in the proceedings below as “the 3rd Decision”. The relevant parts of the letter read as follows:
“Our client [i.e. the Commissioner] has duly considered the circumstances described in your letter and is not satisfied that owing to absence from Hong Kong, sickness or other reasonable cause, the Company has been prevented from lodging an objection within one month after the dates of the notices of assessment for the Years of Assessment under s 64 of the Inland Revenue Ordinance (“the Ordinance”). Our client is therefore unable to accept your letter as a valid notice of objection under s 64 to the said assessments.
Our client also considers that s 70A of the Ordinance is not applicable to the 2003/04 assessment as there is no error or omission in the 2003/04 tax return submitted.
Please note that s 70 of the Inland Revenue Ordinance provides, inter alia, that where no valid objection has been lodged within the statutory one-month objection period against an assessment as regards the amount of the assessable profits assessed, the...
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