Family Focus Week: 101 on Division of Assets in Divorce Proceedings

Family Focus Week: 101 on Division of Assets in Divorce Proceedings

Family Focus Week: 101 on Division of Assets in Divorce Proceedings 487 409 Alfred Ip

Following the very delicate children issues about which we talked yesterday, another aspect which is equally important in divorce proceedings is ancillary relief.

In this article, we outline the principles laid down by the famous LKW v DD (2010) 13 HKCFAR 537, the leading case on ancillary relief in Hong Kong. We then look at some common scenarios that can happen when things turn for the worst in a marriage, as well as the options available to tackle such situations.

 

Before we consider the common law principles, let’s take a brief look at the statutory provisions governing the making of ancillary relief orders, i.e. section 7 of the Matrimonial Proceedings and Property Ordinance (Cap. 192) (the “MPPO”) which provides that the Court must have regard to the conduct of the parties and all the circumstances of the case including the following:

  1. the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future;
  2. the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
  3. the standard of living enjoyed by the family before the breakdown of the marriage;
  4. the age of each party to the marriage and the duration of the marriage;
  5. any physical or mental disability of either of the parties to the marriage;
  6. the contributions made by each of the parties to the welfare of the family, including any contribution made by looking after the home or caring for the family;
  7. in the case of proceedings for divorce or nullity of marriage, the value to either of the parties to the marriage of any benefit (for example, a pension) which, by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring.

The Court of Final Appeal in LKW v DD adopted the UK line of authority and introduced a 5-step exercise on how the Court should approach section 7 of the MPPO.

Step 1: Identifying the matrimonial pot

Before the Court could proceed to divide the parties’ assets, the first step is to ascertain the net financial resources of each party. As provided in point (1) above, the Court would have regard to the income, earning capacity, property and other financial resources which each of the parties has or is likely to have in the foreseeable future.
The duty of full and frank disclosure
To ensure that the Court has sufficient information about their assets, the parties have an important duty of full and frank financial disclosure. Failure to comply with the same may result in adverse inference being drawn against him/her and costs consequences.
The parties are required to complete a comprehensive financial disclosure form known as “Form E” after ancillary relief claims are made. Following that, if necessary, either party may request further and better particulars from the other party to seek further disclosure and clarifications on the other party’s disclosure. If a party refuses to provide certain disclosure, the other party may make an application to the Court seeking an order requiring disclosure of specific information and/or documents. As one can imagine, in high-conflict cases, substantial time and costs could be incurred just on the question of financial disclosure before the case reaches the ancillary relief trial.

Step 2: Ascertaining the parties’ financial needs

As stated in points (2) to (5) above, the Court would evaluate the financial needs, obligations, responsibilities each party has or is likely to have in the foreseeable future, as well as the parties’ standard of living during the marriage, age and any disability.
Often the exercise stops at this step if the matrimonial pot is insufficient or just enough to meet both parties’ needs.

Steps 3 and 4: Deciding to apply the sharing principle and considering whether there are good reasons for departing from equal division

It is only when there are surplus assets after the parties’ needs are catered that the Court would proceed to consider whether to apply the sharing principle.
The starting point for assets division is a 50/50 split unless there are good reasons for departing from an equal division. Examples of the relevant factors include:

  • the existence of pre-nuptial or post-nuptial agreements (please refer to our previously published article “Marital Agreements as Necessary Tools for Damage-Control on Rainy Days”);
  • the section 7 considerations set out above (such as the length of marriage, standard of living during the marriage, earning capacities, etc.);
  • conduct, which will not be considered relevant unless it is “obvious and gross”.
Step 5: Deciding the outcome

The decision to depart from equality and the weight to be given to any relevant considerations are matters of discretion for the Court and are fact-specific.
Overall, when conducting the 5-step exercise, the Court should bear in mind the overarching principles below:

  • the objective is to arrive at a distribution of assets which is fair as between the parties;
  • there should be no gender or role discrimination;
  • the yardstick of equal division should be departed from only for good and articulated reasons;
  • the exercise is not an attempt to conduct a minute retrospective investigations of the failed marriage.
Periodical payments or “clean break”?

The Court is empowered under sections 4, 5, 6 and 6A of the MPPO to make a range of ancillary relief orders, e.g. orders for periodical payments, lump sum payments, transfer of property, etc. Subject to the respective financial capabilities of the parties, the Court will typically try to achieve a clean break, i.e. terminating the financial dependency of one party against the other so that both parties could move on with their lives. This is often achieved by the granting of lump sum orders and distribution of property orders. The amount of award depends on various factors such as the total amount of maintenance a party could reasonably expect to get which would cover his/her financial needs throughout the expected duration of maintenance. On the other hand, a clean break may not be appropriate if for instance, a clean break would exhaust a party’s capital assets and thus prejudice his/her ability to earn.

We now turn to some specific issues that may arise in a divorce.

Properties involving third party interests

For various reasons (such as high property prices, tax reasons or personal reasons), it is nowadays not uncommon for parents to register their children’s names in certain assets or contribute financially in the acquiring of certain assets for their children. When the children get a divorce, the beneficial ownership of those assets often becomes the centre of dispute. A typical scenario would involve a party claiming that he/she holds certain landed property on trust for his/her parents whilst the other party claims that his/her ex-spouse holds that landed property beneficially.

In such circumstances, it is established that the parties could commence preliminary issue proceedings within the divorce proceedings. The preliminary proceedings involve a separate hearing in which the Court would determine the beneficial ownership of the asset in dispute before the ancillary relief matter proceeds further. The relevant third parties should be joined to the proceedings and be heard at the preliminary issue hearing.

The objective of the preliminary issue proceedings is to streamline the ancillary relief process. After the beneficiary ownership of certain assets is resolved, there might be a greater chance for the parties to negotiate a settlement and thus the need to have to go through a full ancillary relief trial might be avoided.

Whether it is beneficial or cost-effective to commence preliminary issue proceedings depends on the circumstances, such as the overall size of the matrimonial pot. It is best to consult a lawyer when such complex issues are involved.

Disposal of matrimonial assets

If a party becomes aware that his/her ex-spouse is about to dispose of or transfer out any assets, thereby putting those assets out of reach of him/her in divorce proceedings, section 17 of the MPPO may provide a remedy. The party may make an application to the Court to restrain the other from making that disposition or transfer. In some cases, time is of the essence and an urgent injunction application may have to be made.

If unfortunately an ex-spouse has already disposed of or transferred out certain assets, section 17 of the MPPO which provides power to the Court to set aside the disposition or transfer may still be of assistance. The party making the application for setting aside the disposition or transfer has to prove that the other party made such disposition or transfer with the intention of defeating his/her claim for financial provision. It is worth noting that if the disposition or transfer took place less than 3 years before the date of the application, the intention of defeating the applicant’s claim for financial provision is presumed unless the contrary is shown.

Prevention is better than cure. Preserving assets before they are transferred out is always better than recovering them. In particular, the situation will be more complicated and uncertain if the assets are already transferred to third parties because then the Court will also have to consider third party interests. Hence, if disposal of matrimonial assets is a major concern in a case, one is strongly advised to seek independent legal advice as soon as possible.

Conclusion

As circumstances vary from case to case, a thorough understanding and analysis of the specific situation would be needed before a comprehensive advice could be provided. If conflict situations in a divorce are expected, parties are strongly recommended to seek independent legal advice before the situation becomes overcomplicated and out of hand.

Our team at Hugill & Ip has extensive experience in dealing with Hong Kong family laws – so kindly get in touch with us to find out how we can help.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

Alfred Ip

Alfred Ip

Alfred assists high net-worth individuals (HNWIs) in handling their wealth-related issues, such as contentious and non-contentious trust and probate, mental capacity, family office, amongst other wealth management matters. He is also a leading Dispute Resolution lawyer with over 20 years of experience in Hong Kong. Moreover, Alfred helps clients with issues regarding Family Law.

All articles by : Alfred Ip
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