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Shiu Wing Ltd. And Others v The Commissioner Of Estate Duty

Judgment Cited authorities 10 Cited in Precedent Map Related
Vincent
Judgment Date12 July 2000
Citation[2000] 3 HKLRD 76; (2000) 3 HKCFAR 215
Judgement NumberFACV17/1999
Subject MatterFinal Appeal (Civil)
CourtCourt of Final Appeal (Hong Kong)
FACV000017/1999 SHIU WING LTD. AND OTHERS v. THE COMMISSIONER OF ESTATE DUTY

FACV000017/1999

FACV No. 17 of 1999

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 17 OF 1999 (CIVIL)

(ON APPEAL FROM CACV NO. 199 OF 1998)

_____________________

Between:

SHIU WING LIMITED 1st Appellant
FUTURIAN LIMITED 2nd Appellant
SHIU KWONG LIMITED 3rd Appellant
AND
THE COMMISSIONER OF ESTATE DUTY Respondent

_____________________

Court: Chief Justice Li, Mr Justice Litton PJ, Mr Justice Bokhary PJ, Mr Justice Silke NPJ and Sir Anthony Mason NPJ

Date of Hearing: 13, 14 and 15 June 2000

Date of Judgment: 12 July 2000

___________________________

J U D G M E N T

___________________________

Chief Justice Li :

1. I agree with the judgment of Sir Anthony Mason NPJ.

Mr Justice Litton PJ :

Introduction

2. The appellants are three companies incorporated in the Isle of Man. They seek a discharge of the order of the Court of Appeal made on 20 August 1999 (Mortimer VP and Godfrey JA, Rogers JA dissenting) and a restoration of the order of the trial judge Findlay J whereby he declared that certain dispositions of property made by a deceased within 3 years of his death fell outside the charge to estate duty.

Background

3. In December 1989 Mr Pong Ten Un ("Mr Pong") was 85 years old and suffering from cancer. He had been ill for some years. In that month 5 unit trusts were set up in the Isle of Man. The sole trustee of those unit trusts was a Manx company incorporated in the same month called Shiu Wing Ltd ("SWL"). The directors of SWL were Mr Pong's wife ("Mrs Pong") and his 7 children Harry, Frank, David, Edward, Stanley, Elizabeth and Teresa. The sole shareholders of SWL were two other Manx companies : Shiu Kwong Ltd (whose directors were Harry, Frank, David and Edward) and Futurian Ltd (whose directors were Mrs Pong, Stanley, Elizabeth and Teresa). At about the same time discretionary trusts were set up in the Isle of Man for the benefit of the children; the trustees of those discretionary trusts were Shiu Kwong Ltd and Futurian Ltd (hereafter to be referred to as "the discretionary trustees").

4. At that time (December 1989) Mr Pong owned properties in Hong Kong which, upon his death, would have passed to his Hong Kong estate and would have attracted estate duty under s.5 of the Estate Duty Ordinance, Cap. 111. By s.6(1)(c) property passing on the death of a deceased is deemed to include property :

"... 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 ...."

5. The properties owned by Mr Pong fell into two categories :

(1) shares in various Hong Kong private companies, in particular shares in Shiu Wing Steel Ltd (held directly and through a holding company) which operated the largest steel mill in Hong Kong; and

(2) real estate : (a) a property called the Hillview property and (b) Yau Tong Inland Lot No. 4 ("the YTIL property") where the steel mill was located.

6. At that time there were various factors at play which caused Mr Pong to enter into the transactions which gave rise to the present litigation. These are summarized in Godfrey JA's judgment as follows :

"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 transactions

7. Two sets of transactions are involved in the present litigation : (1) Transactions effected on 25 January 1990 and (2) transactions relating to the YTIL property on 24 October 1990.

8. In essence, the transactions which Mr Pong entered into on 25 January 1990 were as follows :

The shares

(1) These were sold to SWL as trustee for the various unit trusts for a total of $65,542,894.

(2) Mr Pong then lent the proceeds of sale to the discretionary trustees.

(3) With these loans the discretionary trustees applied for units in the unit trusts held by SWL. Units were accordingly allotted.

The Hillview property

(1) Mr Pong sold the Hillview property to SWL as trustee for the Hillview Unit Trust for $42.2m.

(2) The proceeds of sale, received in Macau, were given in Macau as a gift to Shiu Kwong Ltd and Futurian Ltd as trustees of the Pong Ding Yuen Trust.

(3) Using this sum of $42.2m the trustees of the Pong Ding Yuen Trust applied to SWL for units in the Hillview Unit Trust. Units were accordingly allotted.

9. Pausing here, if nothing else were said, the effect of these transactions seen from the estate duty point of view would have been as follows : As regards the shares, Mr Pong would have divested himself of his ownership in the Hong Kong shares upon sale to SWL and he would have acquired specialty debts owed by the discretionary trustees in the Isle of Man; those two companies (Shiu Kwong Ltd and Futurian Ltd) would have owned units in the various unit trusts held by SWL, a Manx company; in effect, the ownership of the shares would have transferred from Mr Pong to SWL in consideration of the off-shore debts. The units allotted to the discretionary trustees (in consideration of the payment of money lent to the discretionary trustees by Mr Pong) would likewise be offshore assets. These would not be property which attracted estate duty upon Mr Pong's death, as s.10(b) provides that estate duty shall not be payable in respect of property situate outside Hong Kong. It is common ground that factually that is what did happen as regards Mr Pong's shares on 25 January 1990. So the appellants ask quite simply this : Why should the Court not give effect to the legal consequences of these admittedly genuine transactions in applying the provisions of the Estate Duty Ordinance?

10. As regards the Hillview property, Mr Pong would have transferred ownership of the property to SWL upon sale and would have then given the proceeds of sale to the Pong Ding Yuen Trust in Macau which, with that sum, would have acquired units in the Hillview Unit Trust. The gift which Mr Pong made was of property situated in Macau, not Hong Kong : Hence, even if he were to die within 3 years, the gift would have fallen outside the scope of s.6(1)(c). Again the appellants ask : Why should legal effect not be given to these transactions in applying the Estate Duty Ordinance?

11. As regards the YTIL property, Mr Pong entered into the following transactions on 24 October 1990 :

(1) The YTIL property was sold to SWL as trustee for the YTIL Unit Trust for $139m.

(2) Mr Pong lent the proceeds of sale to the discretionary trustees.

(3) With the loans the discretionary trustees applied for units in the YTIL Unit Trust. Units were accordingly allotted.

12. Again, pausing here, if nothing else were said, the effect of these transactions seen from the estate duty point of view would have been simply this : Mr Pong would have divested himself of his ownership in the YTIL property upon sale to SWL and would have acquired specialty debts located in the Isle of Man : No estate duty would have been payable in respect of these specialty debts upon his death : see s.10(b).

The Estate Duty Commissioner's case

13. The Estate Duty Commissioner does not challenge the genuiness of the transactions, as summarized above, and accepts that they did in fact take place. He says however that when other factors are put into the equation and the principles of construction developed in W T Ramsay Ltd v. IRC [1982] AC 300 are applied, it can be seen that in reality what Mr Pong did on 25 January and 24 October 1990 was to have made immediate gifts of his Hong Kong shares and properties to his children by way of settlements upon trust : Since he died, unfortunately, on 23 January 1993, three days short of the 3 years provided for in s.6(1)(c), all the shares and properties became assessable to estate duty.

14. The factors omitted from the above summaries are these. SWL had no money. The money movements, which resulted in SWL acquiring the Hong Kong shares and properties, and issuing units to the discretionary trustees, were circular. On 25 January Mrs Pong borrowed $139m from the Standard Chartered Bank in Macau. This was unsecured. No interest was paid. The money was lent to SWL which then initiated the transactions as summarized above. The money then came back to SWL as the consideration for the allotment of units to the discretionary trustees; thus Mrs Pong was repaid and she in turn repaid the bank. What the bank statements reveal is that for each transaction one complete cycle of money movements was used : from Mrs Pong, and then back to Mrs Pong; and when all the transactions were completed Mrs Pong paid back the money to the bank. As everything was pre-ordained the completion of these cycles would have taken very little time. It all happened on the same day. Although Mrs Pong borrowed $139m on...

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