Posts Tagged ‘ancillary relief’

Family home legally owned by company controlled by one of the spouses

November 18, 2018

Introduction

Section 6 of the Matrimonial Proceedings and Property Ordinance (‘MPPO’) empowers the court, in divorce proceedings, to require the transfer  of the property of one party (A) to the other (B). This order can only relate to property to which A ‘is entitled, either in possession or reversion’.

How does this operate with regard to property legally owned by a company controlled by A? Does section 6 empower the court to order the company to transfer the property to B? If so, on what basis?

This was the question considered by the UK Supreme Court in Prest v Petrodel Resources Ltd ([2013] UKSC 34).  It is of considerable practical importance to B, especially where much of A’s wealth is tied up in the company. It is true that the court could order A to transfer the shares in the company to B but, as Lord Sumption observed, ‘ this will not always be possible, particularly in cases like this one where the shareholder and the company are both resident abroad in places which may not give direct effect to the orders of the English court.’ ([40]).

Thus, the court has to confront the important legal question as to whether it is entitled to pierce the corporate veil and whether there is any special jurisdiction to pierce the corporate veil in matrimonial proceedings.

No special jurisdiction to pierce the corporate veil in matrimonial proceedings

The UK Supreme Court laid to rest the idea that England’s family law courts had any special power to pierce the corporate veil. The English equivalent to section 6 of the MPPO (which is in identical terms to the Hong Kong provision) was not open to this interpretation ([37] – [42] Lord Sumption).

If the courts have the power to order the transfer of the property to B it will either be because: (i) the company holds the property on trust for A so that the order can relate to A’s equitable interest; or (ii) the case is one where it is appropriate, applying general principles, to pierce the corporate veil.

Where the company is trustee for A

In Prest, there were several properties which A had either transferred to a company controlled by him for no consideration or where A had supplied the company with the funds to make the purchase and there was no evidence that this was by way of loan or in return for shares in the company. Thus, on general equitable principles, the company held the properties on trust for A. A could be, and was, ordered to exercise his control over the company to procure the transfer of the legal title to the properties to B.

In an important passage, Lord Sumption said:

‘Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership’ ([52] emphasis added).

Similarly, Lady Hale said that the power in section 6 MPPO  ‘is a very specific statutory power to order one spouse to transfer property to which he is legally entitled to the other spouse. The argument is that that is a power which can, because the husband owns and controls these companies, be exercised against the companies themselves. I find it difficult to understand how that can be done unless the company is a mere nominee holding the property on trust for the husband, as we have found to be the case with the properties in issue here. I would be surprised if that were not often the case ([93] emphasis added).

Piercing the corporate veil

The Supreme Court rejected the idea that the English equivalent of section 6 of the MPPO created a right to pierce the corporate veil. The court could only pierce the corporate veil if there were some general principle that allowed it to do so. Lord Sumption thought that such a principle did exist:

‘I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality ([35]).

This principle did not come into play here. There was nothing on the facts of Prest that allowed the court to invoke this principle.

Michael Lower

 

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LKW v DD -‘equal sharing’ principle

June 20, 2016

In LKW v DD ((2010) 13 HKCFAR 537) the Court of Final Appeal had to deal with the issue of the division of assets between a divorcing couple where the available assets exceeded the parties’ needs. Ribeiro PJ gave the only full judgment.

The principles that govern the making of an ancillary relief order are those contained in section 7 of the Matrimonial Proceedings and Property Ordinance. Given the close structural similarities between it and section 25 of England’s Matrimonial Causes Act 1973 it is unsurprising that Hong Kong’s courts have had regard to the English authorities on section 25 ([11]). Had the applicable principles in Hong Kong changed given the House of Lords decisions in White v White and Miller v Miller and McFarlane v McFarlaneC V C represented the law in Hong Kong before White v White. Wives in ‘big money’ cases got enough to meet their reasonable requirements and any surplus over joint needs went to the husband unless the wife could show that she had ‘earned’ a share in the surplus. The C v C approach was not good law since it gave excessive weight to ‘needs’ / ‘reasonable requirements’ which is only one of the section 7 criteria.

The overarching requirement is to achieve a fair solution:

‘what is fair treatment upon the dissolution of a marriage involves concepts which ‘change from one generation to the next’ and the values underlying C v C do not reflect elementary notions of fairness as between husband and wife in present day Hong Kong. To confine a non-working wife’s award to the sum needed to meet her “reasonable requirements” and to permit the husband to keep the remaining assets is patently unfair and discriminatory’ ([28]).

It was argued that to follow White v White would be to apply western values to Hong Kong’s Chinese population ([37]). Ribeiro PJ rejected this. White v White‘s insistence on fairness was equally relevant in Hong Kong ([40).

Ribeiro PJ emphasised that the guidance that he would give later in his judgment was only that. He was providing guidelines to assist judges in the exercise of their section 7 discretion case-by-case. The guidelines represent an attempt to balance flexibility and legal certainty ([47] – [53]). They only apply where there is a surplus of assets over needs ([54] – [55]).

Ribeiro PJ identified five steps to be followed:

  1. Identify the parties’ assets ([71] – [73]);
  2. Assess the parties’ financial needs ([74] – [79]);
  3. Apply the sharing principle if assets exceed needs ([80] – [82]);
  4. Consider whether there are good reasons for departing from equal division (equal sharing should not be applied mechanistically) ([83] – [86]);
  5. Decide the outcome ([131] – [132]).

He also identified four principles to be gathered from White v White which judges should bear in mind in applying section 7:

  1. The objective of fairness ([56]);
  2. Rejection of discrimination ([57]);
  3. Apply the yardstick of equal division ([58] – [61]);
  4. Avoid ‘minute retrospective investigations’ (a lengthy and pointless trawl through the details of the parties’ conduct over the course of the marriage) ([62] – [69]).

The judgment contains useful guidance on the application of several of the steps.

In the present case, the Court of Appeal had awarded the wife half of the total assets and there was no basis for interfering with this award.

Michael Lower

White v White: the equality ‘yardstick’

June 12, 2016

In White v White ([2001] 1 AC 596, HL) a couple divorced after thirty years of marriage. The appeal concerned the ancillary financial relief proceedings. This was a case where the couple’s joint assets were more than sufficient to meet the needs of them both. The House of Lords had to consider how the discretion conferred on the courts by the Matrimonial Causes Act 1973 (‘the Act’) should be exercised in cases such as this. Mrs. White sought an order giving her an equal share in all of the assets. Lord Nicholls gave the main judgment. He pointed out that this was a case where there was an ‘equality of contribution’ by Mr. and Mrs White over the course of their marriage. This was an important feature of the case (at 602).

Section 25 of the Act requires the court to have regard to all the circumstances of the case when exercising its discretion; the welfare of children is of first importance. Section 25(2) contains a list of factors to which the court is to have regard. Section 25(2)(f) requires the court to have regard to, ‘the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after or caring for the family’. Lord Nicholls made the point that the need for the outcome to be fair meant that there was no place for discrimination:

‘But whatever the division of labour chosen by the husband and wife, or forced upon them by circumstances, fairness requires that this should not prejudice or advantage either party when considering paragraph (f), relating to the parties’ contributions … If, in their different spheres, each contributed equally to the family, then in principle it matters not which of them earned the money and built up the assets. There should be no bias in favour of the money-earner and against the home-maker and the child-carer ‘ (at 605)

A judge may be minded to order an unequal division of the couple’s assets :

‘Before reaching a firm conclusion and making an order along these lines, a judge would always be well advised to check his tentative views against the yardstick of equality of division. As a general guide, equality should be departed from only if, and to the extent that, there is good reason for doing so. The need to consider and articulate reasons for departing from equality would help the parties and the court to focus on the need to ensure the absence of discrimination.’ (605)

There is no presumption of equality (only a ‘yardstick’) but:

‘Today there is greater awareness of the value of non-financial contributions to the welfare of the family. There is greater awareness of the extent to which one spouse’s business success, achieved by much sustained hard work over many years, may have been made possible or enhanced by the family contribution of the other spouse, a contribution which also required much sustained hard work over many years. There is increased recognition that, by being at home and having and looking after children, a wife may lose for ever the opportunity to acquire and develop her own money-earning qualifications and skills.’ (605 – 6)

Judicial approaches that would give the wife enough to meet her needs but would allocate any surplus over needs to the husband mean that ‘discrimination would be creeping in by the back door.’ (608) Needs are only one factor and the court needs also to have regard to factors such as the available resources and the parties’ contributions (609).

‘In my view, in a case where resources exceed needs, the correct approach is as follows. The judge has regard to all the facts of the case and to the overall requirements of fairness. When doing so, the judge is entitled to have in mind the wish of a claimant wife that her award should not be confined to living accommodation and a vanishing fund of capital earmarked for living expenses which would leave nothing for her to pass on. The judge will give to that factor whatever weight, be it much or little or none at all, he considers appropriate in the circumstances of the particular case.’ (610)

The Court of Appeal had awarded Mrs. White two-fifths of the couple’s net wealth (almost doubling the amount awarded at first instance) and the House of Lords upheld this award.

Michael Lower

 

 

Charging order over share in the family home: striking the balance

February 3, 2016

In Melco Crown Gaming (Macau) Ltd v Wong Yam Tak ([2016] HKEC 237) title to the family home was in H’s name but W had an equal beneficial interest under a common intention constructive trust. M was granted a charging order nisi in May 2013 and (having been duly registered) this had priority over a consent order made in July 2013 in matrimonial proceedings ordering H to transfer his interest in the property to W ([43] Deputy Judge Yee).

The normal practice would be for the court dealing with ancillary relief in the matrimonial proceedings also to deal with the charging order. Here, however, there was unlikely to be any further application for ancillary relief ([48] – [49]).

Section 20(3) of the High Court Ordinance requires the court to consider all the circumstances of the case when considering whether or not to make the charging order absolute. It has to consider the personal circumstances of the debtor and whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order. The factors to be borne in mind and the orders that might be made were considered by the English Court of Appeal in Kresmen v Agrest ([2013] EWCA Civ 41). There is a need to strike a balance between the expectations of the creditor and the hardship to W and the children. In Melco, W’s daughter was adult and independent so only W’s interest in having a roof over her head was relevant.

Here, even if the charging order over H’s share were made absolute, Melco could not expect to succeed in an application for an order for sale ([57]). Thus, a fair balance could be struck by making the order absolute. W would remain in exclusive occupation of the property ([58] – [59]).

Michael Lower