Timothy Brennan QC succeeds in the Hong Kong Court of Final Appeal
The Hong Kong Court of Final Appeal has given judgment in Moulin Global Eyecare Trading (in Liquidation) v The Commissioner of Inland Revenue (FACV No 5 of 2013). The case involved complex issues concerning attribution to a company of the fraud of certain of its directors, together with points of construction of the Inland Revenue Ordinance (IRO) of Hong Kong.
The Appellant company was ordered to be wound up in 2006. Its former directors (later convicted of fraud – “commercial crime of the worst kind”) had massively inflated the company’s reported profits through fictitious sales. Profits tax returns were submitted based on false accounts and, in respect of the years 1998/99 to 2003/04, the company paid almost HK$89 million in profits tax. The liquidators claimed a refund on the basis that the company did not truly make any taxable profits in the relevant years, and that its reported profits were false.
The liquidators’ claim was based on:
- s 64 of the IRO, which allows a taxpayer to object to an assessment within one month provided that, if owing to reasonable cause, the taxpayer is prevented from objecting within time, an extension of time may be granted; and
- s 70A of the IRO which empowers the Commissioner to correct an assessment within six years after the end of a year of assessment (in the present case, only 2003/04 was eligible) if the tax charged is excessive by reason of an error in the tax return.
The Commissioner rejected the liquidators’ claim, an important reason given being that the relevant returns were filed by the Appellant with knowledge of the fraud.
The Court accepted the importance of having a fair and efficient tax system which can be expected, year on year, to produce public revenue to a more or less predictable level. To that end, prompt payment and finality within a reasonably short time were the policy aims of the provisions in question. After reviewing the factual situation and the language and legislative purpose of the statutory provisions, the Court held that the guilty knowledge of the fraudulent directors should be attributed to the Appellant in the present context. The leading judgment of Lord Walker of Gestingthorpe NPJ contains a detailed restatement of the law of “attribution” of the fraud of directors of a company to the company itself (see in particular the summary at paragraph 106 of his judgment).
The Court unanimously dismissed the appeal under s 64(1)(a) and, by a majority (Tang PJ dissenting), dismissed the appeal under s 70A. The liquidators could not rely on the proviso in s 64 because the Appellant was not “prevented” from lodging an objection in time: it chose not to do so. Nor could the liquidators rely on s 70A, because the Appellant, knowing that the return was false, had not made an “error” in the return but had instead told a deliberate lie in it.
Timothy Brennan QC was instructed by Yvonne Cheung of the Department of Justice of the Hong Kong Special Administrative Region. Junior counsel was Roger Beresford of Prince’s Chambers, 3002 Tower Two, Lippo Centre, 89 Queensway, Hong Kong.
The full judgments of the Court are available here and the press summary is available here.
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