What constitutes a matrimonial asset?
Sharon Ser is Regional Senior Partner, Asia, at Withers Hong Kong
Introduction
In recent years, Hong Kong has become known as the divorce capital of Asia often following English
law and London is the so called divorce capital of the world. Awards will often start from equality,
some of which have been record breaking as a result. However, this can be misleading as reference
to equality relates to gender equality and equality between the breadwinner and the homemaker
rather than an equal division of the assets per se. The test is in fact 'fairness' and there is only a
'yardstick of equality'.
Although an equal division is often appropriate, particularly following a long marriage, there are
many instances when there will be a divergence from equality, normally relating to a party's needs,
or when it is appropriate to look at contribution, for example in a short marriage. The courts
regularly look at whether an asset should form part of the marital pot or not or whether there are
certain assets which would justify a departure from equality. Where the resources of the parties are
limited, the exercise in asset division will end with an assessment of their needs and if one party's
needs exceeds the other, this will not result in equal division. Thereafter, following the 2010 Court of
Final Appeal case of LKW v DD, if there are assets available in excess to needs, the 'sharing principle'
will apply. The first exercise the court must undertake however is to ascertain what assets are
matrimonial: what is 'in the pot'?
Family assets which may not form part of the pot for division
Some of the most significant cases before the courts in England and Hong Kong relate to whether
certain assets can form part of the pot for division at all. These cases often include Trusts, beneficial
interests of third parties and assets owned by a company.
Trusts
In the well-known Court of Final Appeal case in Hong Kong of Kan Lai Kwan v Poon Lok To Otto
[2014] HKFLR 329 (the 'Poon' case), the husband endeavoured to persuade the court that a third of
the value of the assets in the trust should be ring-fenced for the benefit of the parties' daughter. In
that particular case, the Court of Final Appeal found that all of the assets in the trust should form
part of the pot because the husband had at all times had control of the trust. The 'resources test' in
the English Supreme Court case of Charman v Charman was applied, namely ‘whether, if the
husband were to request it to advance the whole (or part) of the capital in the trust to him, the
trustee would be likely to do so’. In that case it was found as fact that the husband was able to direct
the trustees as the trust comprised of shares in his successful business, over which understandably
he did not want to lose control. Interestingly, the Court of Appeal had found that a third should be
ring-fenced for the daughter as an 'innocent' third party beneficiary of the trust. This was, however
overturned at the Court of Final Appeal.
However, this would suggest that the assets in a properly drafted trust, in which the assets were not
or are no longer under the control of the settlor, would not form part of the pot and can be ringfenced.
Beneficial Interests
Many families in Hong Kong purchase properties or gift shares in family companies for their children
and leave the asset in the sole name of their child. Such cases regularly go before the Hong Kong
courts where the parents are joined as interveners to establish ownership of the property. Often this
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application is dealt with as a preliminary hearing to ascertain whether or not that property should
form part of the pot or whether the parents are bone fide owners of the beneficial interest.
If property is in the name of an individual, that person is deemed to hold the beneficial, as well as
the legal interest in the property. It is for him to prove otherwise and if the transfer of shares or
property is from one family member to another, there is a presumption that it is a gift. If there is a
Declaration of Trust, then this is normally the end of the matter and deemed to be sufficient proof
that the ownership is retained by the giver. Very often, however, there is no declaration and the
courts then need to look at the intention of the transferor at the time of the transfer. These cases
can be complex and expensive as details must be found, many years later, sometimes after the
transferor has passed away. There was recently a case in the Hong Kong courts where the husband
held the legal title to property allegedly for his mother following the death of his father. In that case,
the judge found that the property was indeed beneficially owned by the mother and was therefore
not included in the pot for division.
In the recent famous case in Hong Kong of TCWF v LKKS & Ors (No.1) [2014] HKFLR 1, in which the
finding of the Court of Appeal that the shares in a Japanese property business was owned, not by the
husband but was subject to a Framework Agreement in favour of his father, resulted in the award to
the wife being reduced from approximately HK$1.4 billion to HK$400,000.
Property held by a company
It is common in Hong Kong for families to hold property in the name of companies. In the English
Supreme Court case of Prest v Petrodel, the court confirmed that it was not able to look behind the
corporate veil and applied principles from company law authorities.
This case involved a number of off-shore companies holding real property in England. Here however,
the court did find that there was a resulting trust in favour of the husband but only on the particular
circumstances of that case. On detailed examination of the evidence, which was obscure as a result
of the husband's difficult litigation conduct, and therefore presumptions were drawn against him,
the court found that in each case the husband had provided the funds for the companies to
purchase the properties and that the companies held the assets on bare trusts: since the beneficiary
of such a trust was absolutely entitled to end the trust at any time and take the property for himself,
the court was able to find that the assets were a resource of the husband.
This case was highly fact specific however, and, on reading the case it is clear that the court
sympathised with the wife, following a long marriage with children and facing no financial security
going forward. The court found that the Husband had GBP37.5 million of available assets for
distribution and awarded the wife half.
Prenuptial and post nuptial agreements
If the agreement is found to be fair and reasonable, these agreements increasingly are effective
ways to keep assets out of the pot for division. We wrote an article in the October edition on
prenuptial agreements and therefore do not intend to dwell on these here ['Prenuptial agreements:
Can we rely on them?' By Sharon Ser]. However, in England and Hong Kong, they cannot oust the
jurisdiction of the court. It is a matter of what weight should be placed on them, and increasingly the
courts will find in favour of upholding these agreements.
Family assets which may form part of the pot for division but which may justify a departure from
equality
Premarital assets
'Contribution' is one of the factors a court must take into account when considering what would be a
fair division of the assets. If there are assets owned prior to the marriage, these may well be a
reason for departing from equality, particularly in a short marriage. The general rule is that, the
longer the marriage, the less likely is it that these assets will be considered worthy of separate
treatment. Often in a marriage, such assets are brought in, changed, sold and used to repurchase,
upgraded and mortgaged and it is simply too difficult to trace how much of the original seed money
should be taken into account. The premarital property had also been used to maintain the families'
lifestyle over the years and therefore should be included. However, if the marriage is short and it is
clear that one party was significantly wealthier than the other, so long as needs are addressed, it is
likely that these assets will be taken into account as a reason for departure. Think of Paul
McCartney.
This came up in a recent case before the Court of Appeal PW v PPTW CACV 224/2013, where the
court approved the sentiments of Ward J in an English case (Robson v Robson): 'the more and the
longer the wealth has been enjoyed, the less fair it is that it should be ring-fenced and excluded from
distribution in such a way as to render it unavailable to meet the claimant’s financial needs
generated by the relationship’. ‘Weighing the various factors and striking the balance of fairness is,
after all, an art and not a science’.
Gifts and inheritances
The same rules apply in respect of gifts and inheritances. With future inheritances the courts will
generally not include them in the computation as they are too uncertain. There is no guarantee that
the parent will provide for their children in their will or how much, although it may be expected, but
also of course the date when the inheritance may be forthcoming is unknown.
Post separation accruals
We have seen a number of cases where there has been a substantial change in the value of the
family assets from the date the parties separated to the date of the trial. Assets are valued at the
date of trial and it may seem unfair if one party has worked hard and achieved considerable wealth
without the help or involvement of the other party. The division of wealth is, after all, a reflection of
a life together. This often comes up where bonuses are involved or when a party's business has
taken off post separation.
Again the length of the marriage is material. This was the case in the Poon case referred to above.
Here the value of the husband's business had increased significantly from when he suggested the
parties had parted. It was his case that they had in effect been living separately since 2001, the
wife's case that they had been seen to be married and had physically lived together until the
husband moved out of the home in 2008. Even so, there was a considerable post 2008 accrual. The
court found that there should be an equal division, based on 41 years of marriage. They preferred
the wife's evidence in respect of the separation and held that an equal division was appropriate in
such a long marriage where there had been financial and non-financial contributions on both parts.
In the high value case of Cooper-Hohn v Hohn, the 'genesis of the growth' was considered by the
court to be marital which was reflected in the overall quantum, but the husband's special
contribution was also taken into account, particularly the new work and new investments created by
the husband generated post separation. In this case the court awarded 32.12% of the total assets to
the wife, reflecting the husband's special contribution to the point of separation and the growth in
value of his assets post separation.
Bonuses will be taken into account if required in case of 'need'. The recent case law from England
suggests that it is appropriate, where there is income comprising of a monthly salary and an annual
bonus, that the periodical payments be partitioned, with needs being met out of monthly salary and
additional discretionary items out of an annual bonus on a capped percentage basis. If it is not a
needs case, however, only those bonuses which can be seen to be generated during the marriage
will be taken into account.
Conclusion
Many cases come before the courts in Hong Kong to determine whether or not an asset can be
taken into account and if so, to what extent. Hopefully this over view will have been of interest to
those advising clients on these tricky aspects of marital law and assist in wealth planning for the
future.
*Withers lawyers have been involved in all bar one (Prest) of the cases quoted.