ABOUT THE AUTHOR: Marcus Dearle is a family lawyer
and Managing Director of Withers Hong Kong
DD v LKW [2008] HKCA 74, one of the most significant
and far-reaching family law cases in Hong Kong in recent years, is
going to the Court of Final Appeal in October 2010. On 5 March
2008, the Hong Kong Court of Appeal threw out the ‘reasonable
requirements’ principle and adopted the ‘new approach’ of equality
of division, following the English decisions of White and
Miller and McFarlane. The case underlined the
continuing and remarkably strong connection between the courts of
Hong Kong and England and Wales, 13 years after the handover.
Cheung JA reminded us that English decisions are ‘not binding on
Hong Kong courts but highly persuasive authorities… the Hong Kong
legislation on matrimonial property is still based on the almost
identical United Kingdom legislation’.
In a refrain familiar to English family lawyers (apart from,
perhaps, the reference to domestic helpers) who have had ten years
to interpret the impact of the White case, with a plethora
of case law, Cheung JA also said: ‘I would firmly embrace the
approach in White and Miller on the division on
family assets on divorce. On marriage the parties commit to sharing
their lives. It is a partnership of equals. The husband may work
while the wife may stay at home to take care of the family. The
contributions are nonetheless equal. As more frequently happens
these days, with domestic helpers being available, both the husband
and the wife work and make equal contributions to the welfare of
the marriage…On divorce the principle and spirit underlining the
union should be reflected on the basis of fairness and this
necessarily means there is no room for discrimination between
husband and wife. The starting point is equality in division unless
there is a good reason to depart from it.’
The judgment turned Hong Kong overnight into one of the
most generous divorce jurisdictions in the world for the
financially weaker spouse
The adoption of ‘fairness’, equality of division, and the
dismissal of discrimination against the ‘homemaker’ has had a major
impact in Hong Kong on the level of financial awards imposed by
court order in big money cases. The judgment turned the Special
Administrative Region overnight into one of the most generous
divorce jurisdictions in the world for the financially weaker
spouse. The new effective presumption of equality of division
(rebuttable only in appropriate cases) means that divorce awards
are significantly higher than in the days of ‘reasonable
requirements’. Consequently, there is now more of a spotlight in
Hong Kong on trust assets with the courts insisting on seeing the
total ‘pot’ for division, when hitherto they might not have needed
to do so. Indeed, there are a number of high-net-worth divorce
cases going through the courts now in Hong Kong where the main
assets of the family are held in trust and those trusts are being
attacked by the financially weaker spouse.
Threat to trust assets
The approaches that might be taken by the Hong Kong family
courts in relation to trusts are again broadly analogous to those
that are available in the English courts, with many of the relevant
authorities again being English. Many readers will be already aware
that assets held in discretionary trusts, whether onshore or
offshore, are not necessarily safe havens from the jurisdiction of
the English court or the Hong Kong court (See FMFT v HKWE
[2001] 1 HKC 134), because they may be treated as a financial
resource of the parties.
But arguably the most significant threat to trust assets and
family wealth is the court’s power in England to vary nuptial
settlements pursuant to s24(1)(c) Matrimonial Causes Act
1973, where the court can, for example, carve out a sub-trust
fund for the financially weaker party who had no prior connection
with the trust at all. The Hong Kong court has precisely the same
power under s6(1)(c) Matrimonial Proceedings and Property
Ordinance (Cap 192)1.
Lawful asset preservation
Given these developments and the fact that half of the family’s
wealth, including assets held in trust, may end up in the hands of
the financially weaker party, the attention of legal advisors,
trustees and fund managers has inevitably been drawn to the
question of lawful asset preservation. Family lawyers in England
and Hong Kong are increasingly playing a damage-limitation,
wealth-planning role and are advising at a very early and crucial
stage when trusts are set up, often giving advice in tandem with
advice on pre and/or post-nuptial agreements. The emphasis is on
protecting wealth and minimising the scope for future acrimonious
litigation and the fact that trusts remain useful vehicles for
asset preservation provided they are carefully set up and managed
properly. There is increasingly a focus, too, on dynastic trust
planning where those who wish to preserve a proportion of their
wealth and genuinely to pass it down from generation to generation,
may be minded to set up a trust of which, very importantly, they
are not a beneficiary. The letter of wishes is carefully drafted to
stress the importance of passing down wealth through the
generations. A trust set up in this way, years before the breakdown
of the marriage, may well be treated by the English and Hong Kong
court as outside the matrimonial pot for division and not a
financial resource of the parties.
There have so far been no test pre-nuptial or post-nuptial cases
in Hong Kong, but it is thought that the Hong Kong courts will
follow English case law in this area: the Radmacher and Granatino
case in the Court of Appeal in London in 2009, for example, is good
news for the wealthier spouse. There, the Court of Appeal prevented
the financially weaker husband from wriggling out of a pre-nuptial
agreement on the basis that he had not had independent legal advice
or received financial disclosure. The fact that he had deliberately
chosen not to obtain either ingredient made the difference as did
the fact that he had spent quite some time in the financial world
working for JP Morgan. Had he been a vulnerable and inexperienced
young wife the position might have been very different. As ever,
each case will turn on its facts. The case has gone to England’s
Supreme Court and judgment is awaited later this year.
Forum shopping
The major increase in the level of divorce awards in Hong Kong
as a result of the DD v LKW case has inevitably
led some wealthy parties, including those who are beneficiaries of
significant trusts, to look to the mainland PRC for their divorces
and dabble in some forum shopping. The 2009 Hong Kong and Shenzhen
case of ML v YJ (HCMC 13/2006, CACV 89/2008) was
a classic example of forum shopping. It was effectively a race
between the courts in Shenzhen and Hong Kong. The Shenzhen court
won. The Shenzhen court did not take into account HKD840 million of
the husband’s assets. Had the financial case proceeded in Hong Kong
the wife’s award would probably have been about HKD370 million
higher. This case, too, goes to the Court of Appeal in November
2010.
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