Shopping around

  • Author : Marcus Dearle
  • Date : July 2010
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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