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Legal Focus
JULY 2014
International Trust Litigation
On 5 March 2008, the Hong Kong Court of Appeal handed down the landmark LKW v DD judgment which was upheld by Hong Kong’s highest court, the Court of Final Appeal (CFA), in 2010. The court 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 adoption of ‘fairness’, equality of division, and the dismissal of discrimination against the “homemaker” has had an immediate and far-reaching impact in Hong Kong on the level of financial awards imposed by court order in so-called ‘big money cases’. Lawyer Monthly speaks to Marcus Dearle, a Partner and Office Managing Director, Asia of Withers.
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his new effective presumption of equality of division means that divorce awards are often millions of dollars higher than in the days of ‘reasonable requirements’ in the bigger cases. It turned the
Special Administrative Region overnight into one of the most generous divorce jurisdictions in the world for the financially weaker spouse alongside jurisdictions such as England, California and New York. There has been as a direct consequence of the case more of a spotlight on trust assets with the courts insisting on seeing the total ‘pot’ for division, when hitherto they might not have needed to do so. A number of high net worth trust and divorce cases have gone through the courts 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. The trust is usually a foreign one, often based in the BVI, Cayman Islands and Jersey or Guernsey.
The most significant case is the Hong Kong case of PLTO fka PLTO v KLK aka KLKK and HITL [2013] 2 HKLRD 1089. It is the first complex international divorce and trust case in Hong Kong to be considered by the Court of Appeal and the CFA. The professional trustee for the Jersey family trust, HSBC International Trustee Limited, had been joined into the proceedings at an early stage in the case. The author specialises in international divorce and trust matters and heads the family and contentious trust team at Withers Hong Kong representing the trustee.
The CFA hearing took place on 23 June 2014 and the judgment is awaited.
The trust assets were worth HK$1.56 billion (US$200 million). It was a discretionary trust. The main issue was initially whether the trust was a financial resource of the husband, but, of most significance, the focus of the litigation has been extended for public policy reasons by the CFA to cover the treatment of nuptial and variable settlements in a divorce context. The husband was the settlor and protector of the trust. The Judge at first instance disagreed with the view of the wife that the family trust in its entirety was to be regarded as a resource of the husband. In the Court of Appeal, Cheung JA stated :
“in my view the judge [at first instance] was correct when he only took into account a two- third interest in the family trust as the resource that would be available to the husband for the purpose of assessing the matrimonial assets. In so doing the judge had expressly recognized that the husband’s view that the three beneficiaries [the husband, wife and daughter] each has a one-third share is not a correct appreciation of the position. However, the judge considered (and I agree) that the trustee in exercising its duty of safeguarding the interest of all the beneficiaries would not countenance any disposition which results in K’s [the daughter’s] interest being diluted below one-third”.
On 15 November 2013, the CFA gave leave to appeal partly on the ground that there were issues in the case in the case of “great general and public importance”. It held: That the first point of “general and public importance” was:
1. “In the determination of ancillary relief under s7 of the Matrimonial Proceedings and Property Ordinance, and with particular reference to factual situations similar to that in the present case:
2. what should be the proper approach in dealing with discretionary trusts and nuptial settlements……”.
It is the latter second head that will be of most interest to divorce and trust practitioners, not just in Hong Kong, but in England where the law on the treatment of trusts both as financial resources and variable nuptial settlements in divorce is similar. The Supreme Court in London turned down the opportunity in Prest v Petrodel Resources Limited [2013] AC 415 to provide guidance on law concerning, in particular, nuptial settlements in divorce. Hong Kong’s top court has picked up the cudgels for this important mission instead.
Marcus Dearle is a family lawyer and is a Partner and Office Managing Director, Asia of Withers. He is qualified in England & Wales, Hong Kong and the BVI and been a partner since 1995. He is now based in Hong Kong, having spent 19 of his 24 years at Withers based in its London office. He is a Fellow of the International Academy of Matrimonial Lawyers and he is also an officer of the family law committee of the International Bar Association. He has sat on Resolution’s International Family Law committee since 1992. He is the author of the Divorce and Trusts chapter of Sweet and Maxwell’s Family Law and Practice in Hong Kong. LM