United Project Consultants Pte Ltd v Leong Kwok Onn (trading as Leong Kwok Onn & Co)

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 16 August 2005
• Neutral Citation: [2005] SGCA 38
• Date: 16 August 2005
• Subject Matter: Tort,Whether tax agent liable for pure economic loss suffered by company as result of tax agent's failure to warn company accordingly,Duty of care,Company suing tax agent for failing to advise company on repercussions of filing inaccurate tax returns,Negligence,Whether company's actions so culpable as to attract application of illegality defence,Defences,Whether tax agent owing duty of care to company to warn company of consequences of filing inaccurate tax returns where tax agent acquiring knowledge of such inaccuracies,Company providing tax authority with incorrect information as regards to directors' fees
• Docket Number: Civil Appeal No 1 of 2005
• Published date: 17 August 2005
• Defendant Counsel: N Sreenivasan and Valerie Ang (Straits Law Practice LLC)
• Court: Court of Appeal (Singapore)
• Plaintiff Counsel: Hee Theng Fong (Hee Theng Fong and Co)

16 August 2005

Yong Pung How CJ (delivering the judgment of the court):

1 This was an appeal against the decision of Lai Kew Chai J in United Project Consultants Pte Ltd v Leong Kwok Onn [2005] 1 SLR 537 where he rejected the appellant’s claim against the respondent for negligence and/or breach of contract in the discharge of the latter’s duties as the appellant’s auditor and tax agent. We could not agree with the reasoning of the trial judge below and accordingly allowed the appeal. We now give our reasons.

The facts

2 United Project Consultants Pte Ltd (the appellant) is a private limited company providing, amongst other things, engineering services. Mr Leong Kwok Onn (the respondent) is a certified public accountant operating under the name and style of “Leong Kwok Onn & Co”. The respondent was appointed sometime in 1983 by the appellant to act as its auditor and tax agent. He continued to act in that capacity until the middle of 2000.

3 From its inception in 1983 until some time in 1998, the appellant had adopted certain practices in relation to the treatment of its directors’ fees and the tax returns filed in that respect. In the middle of each calendar year (ie, the close of the appellant’s financial year), the appellant’s board of directors would determine how much profits were made in the course of the year and would accordingly declare a certain sum as directors’ fees (“the declared fees”). However, not all the declared fees were distributed to the directors. In fact, the appellant only distributed a portion of the declared fees (“the paid fees”) and retained the difference between the two amounts (“the retained fees”) in a fixed deposit account to accrue, year on year, subject to any additional future distributions to its directors. In the appellant’s books, the retained fees were recorded as a sum owing to the directors. This, unfortunately, was but one half of the story. What is more significant was the manner in which the tax returns for the declared fees were filed.

4 At the beginning of each following calendar year, the relevant income tax forms issued by the appellant to its directors (ie, IR8A forms) only declared the paid fees that were received by each director and not the declared fees due to each director. Furthermore, the appellant treated the whole of the declared fees, whether paid or retained, as a deductible expense item for the purposes of income tax assessment. The consequence of this accounting treatment was that neither the appellant nor its directors had to account to the Inland Revenue Authority of Singapore (“IRAS”) for tax on the retained fees.

5 At all material times, the respondent acted as the auditor of the company and had, in that capacity, certified that the appellant’s accounts were drawn up in such a manner as to give a true and fair view of the state of affairs of the company at the end of each financial year. In addition, he also attended to the appellant’s income tax matters, including the filing of the appellant’s income tax returns (ie, Form C), schedule and computations under the Income Tax Act (Cap 134, 2001 Rev Ed) (“the Act”) and statements and correspondence with IRAS for each year of assessment. At the same time, the respondent acted as the personal tax agent of Mr Ken Tan, the appellant’s managing director, and prepared all of his tax declarations, including the filing of his personal income tax returns (ie, Form B).

6 In 1992, the appellant decided to make an additional allocation of directors’ fees from the pool of retained fees. The appellant alleged that its accountant (“Ms Yeo”) had consulted a member of the respondent’s staff (“Ms Chan”) on how the allocation should be done. Ms Yeo was advised that once the additional amounts due to each director were determined, such payments should then be notionally spread over the previous years and retrospective additional IR8A forms ought to be prepared by the appellant to declare the directors’ fees for each of the respective years.

7 At this juncture, we noted that the respondent had, in his written submissions, sought to convince us that no such advice was ever rendered by Ms Chan. In spite of this, the respondent subsequently conceded at the hearing before us that the meeting in which the advice was rendered had taken place. However, we felt that nothing turned on this issue and will say nothing more of it.

8 Returning to the sequence of events, the appellant, having been so advised by Ms Chan, submitted the relevant forms and paid the additional taxes accordingly. All this was executed without incurring any adverse comment from IRAS.

9 This process was repeated a second time in 1997 – again, without attracting anything untoward from IRAS.

10 However, in July 1998, IRAS queried the appellant about the directors’ fees declared and received for the year of assessment 1997. This led to the respondent’s reply to IRAS, on behalf of the appellant, stating that the total directors’ fees of $2.544m had been declared, and deducted, as an expense for the year ending 1996 whereas the total amount actually paid to the directors was $839,500. Further queries by IRAS prompted a meeting between Mr Ken Tan, Ms Yeo and the respondent. At this meeting, the respondent advised the appellant to distribute all the retained fees, amounting to roughly $6.5m, and to issue additional IR8A forms relating back to the years of assessment 1990 to 1997. This was done and IRAS subsequently imposed a penalty of $1.707m on the appellant, which was the same amount as the tax payable.

The trial in the court below

11 The appellant commenced its claim against the respondent, seeking compensation for losses which it had allegedly suffered by reason of the breach of contractual duty under the retainer and/or breach of a similar duty in tort.

12 The respondent sought, in his defence, to raise four contentions. These were set out by the trial judge in [3] of his judgment as such: Firstly, it was contended that there was in the circumstances no duty in law for the respondent to discover and consequently advise the appellant not to breach the Act in relation to the issue of IR8A forms. Secondly, if there was such a duty, there was no breach. Thirdly, if there was such a duty and there was a breach, such breach did not cause the loss. Fourthly, whether the appellant was barred from recovering any damages by operation of the maxim ex turpi causa non oritur actio.

13 In deciding whether the respondent had breached his duty to the appellant as its auditor and tax agent, the trial judge noted that the respondent, in conducting the annual audit of the appellant’s accounts and in submitting the appellant’s Form C, was not required to know the distribution of directors’ fees. The trial judge also observed that the respondent only received from the appellant the IR8A forms for Mr Ken Tan and not the other directors. It was further brought to his attention that, as a practical aspect, the respondent’s involvement as an auditor took place in the middle of the calendar year, whereas his duties as tax agent occurred at the start of the following calendar year. Therefore, the treatment of the director’s fees as a company expense and the manner in which the directors had declared their income for tax assessment were not reviewed concurrently.

14 Given the various factors above, the trial judge concluded that it would be unreasonable and unjust to impose on the respondent a duty to discover the issuance of incorrect IR8A forms. Consequently, there was no duty to warn the appellant of the attendant tax consequences. On the issue of breach, the trial judge accepted the respondent’s contention that it was the responsibility of the company, and not the tax agent, to ensure that the IR8A forms reflected the directors’ declared fees. As the preparation and issue of the IR8A forms were carried out by the appellant’s internal accountant, and given that there was no way for the respondent to have known the actual amounts paid out to each director, there was no breach by the respondent of a duty to detect errors in the IR8A forms.

15 As for causation, it was held by the trial judge that the respondent had not caused the loss. He reasoned from the evidence adduced at trial that Mr Ken Tan and the appellant’s other financial manager, Mr T L Tan, were the parties responsible for causing the appellant’s loss. They knew what they were doing and had set out with the objective to minimise tax, take the benefit of the tax deductions and, unlawfully, evade having to pay tax on the retained fees. Finally, the trial judge concluded that the defence of ex turpi causa non oritur actio is not confined to illegal acts but also acts of the appellant which, although not illegal, are nevertheless regarded as socially unacceptable. In the premises, he held that there was no basis to award any remedy to the appellant which would relieve it from the known consequences of its actions at the expense of the respondent who could not have detected the breaches and prevented them.

16 The appellant appealed against the whole of the trial judge’s findings.

The issues on appeal

17 The issues, as set out by the appellant, were:

(a) whether the respondent, in the circumstances, knew that there were errors in the directors’ IR8A forms for the calendar years 1990 to 1997;

(b) if so, whether there was a duty imposed upon the respondent to warn the appellant of the tax consequences and to advise it to issue the proper IR8A forms to each director;

(c) whether the respondent was in breach of his duty in (b) above;

(d) whether the respondent had caused the penalty imposed by IRAS and therefore the loss suffered by the appellant; and

(e) whether the appellant should be barred from recovery against the respondent by virtue of the doctrine of ex turpi causa non oritur actio.

Knowledge of the error committed by the appellant

18 In concluding that the respondent was not under any duty to advise the...