AVT then known as MAM v. VNT

CACV 234/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 234 OF 2014

(ON APPEAL FROM FCMC 6762 OF 2012)

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REASONS FOR DECISION

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Hon Lam VP :

1.  I am generally in agreement with Cheung JA in respect of the reasons he gives for our decision on 11 December 2015. On the decision as to costs, in particular the reason for holding that it is unjust to attach the consequences in Order 22 Rule 23 notwithstanding the sanctioned offer of the husband, as my Lord states at paragraphs 11 and 12 below, we were of the view that the further disclosure in the course of the preparation of the valuation report was material to the wife’s consideration of the offer. Bearing in mind the late stage at which the exercise was undertaken, we considered it unjust to attach the cost consequences provided by Rule 23. In matrimonial proceedings, where the parties have positive duties to give full and adequate disclosure of their financial position, the court should find it easier to accept that it would be unjust to attach such consequences when the party who made a sanctioned offer did not give full and adequate disclosure until a very late stage.

2.  However, with respect, I have reservations on applying the rationale of Norris v Norris [2003] 1 WLR 2960 to our current regime.  As my Lord points out, there is a distinction between Rule 2.69D of the Family Proceedings Rules 1991 and our Order 22 Rule 23(5).  As presently advised, I am unable to accept that the absence of the equivalence of Rule 2.69D(1)(e) is immaterial.  Since our Order 22 Rule 23(5) is applicable generally, what are relevant circumstances of a case is to be guided by the general approach of the court in awarding costs.  It is well established that generally the means of a party is irrelevant.  A poor litigant cannot expect the court to make a different costs order on account of his lack of means to pay the costs of his opponent.  This remains to be the case even though the purpose of the litigation is to assess what the litigant should recover to support his living.  Thus, in a personal injury case, a plaintiff who fails to beat a sanctioned offer cannot ask the court to exonerate him from the cost consequences under Rule 23 simply because such a cost order would deprive him substantially of the award he should otherwise receive as fair compensation for his injuries.  In the absence of a provision like Rule 2.69D(1)(e), the means of the parties cannot be a relevant circumstances for the purpose of our Rule 23(5).

3.  It may be that there should be a different regime for matrimonial litigation in light of the positive duty of full disclosure and the court’s quasi-inquisitorial function in ancillary relief application.  There should also be a more forceful drive for a positive duty to engage in meaningful negotiation in good faith and in that respect I fully agree with the observations of the learned President in Norris  v Norris, supra.  The Working Party on Family Procedure Rules chaired by Poon JA had made recommendation that Order 22 should not be applicable to matrimonial proceedings.  For my part, I certainly see some bases for having a special set of rules in the context of ancillary relief proceedings to resolve the tension alluded to by Cheung JA at paragraphs 13 and 14 below.

Hon Cheung JA :

Our orders

4.  Our judgment of 3 July 2015 reduced the wife’s financial provision to $6 million.  We directed the parties to make submissions on costs.

5.  The husband asked for the costs below to be in his favour from 24 May 2013 which is 28 days from the date of his sanctioned offer of $6 million.  The wife did not accept the offer within time.  At trial, the husband made an open offer of $3.074 million.

6.  The husband also asked for the costs of the appeal in his favour because he had succeeded in reducing the judgment below of $9.98 million to $6 million.

7.  The husband also asked for the maintenance pending suit (‘MPS’) of $110,000 per month paid to the wife since the date of the judgment below to be deducted from the judgment sum of $6 million.

8.  At the conclusion of the hearing we ordered there should be no order as to costs below and of the appeal.  We further ordered that the judgment sum of $6 million should carry interest at judgment rate from the date of the judgment below and the MPS paid to the wife since the judgment below should be deducted from the $6 million. There is to be no deduction of the judgment interests on the $6 million by reason of the payment of the MPS from time to time.

9.  We had also made no order on the costs of the application before us.

1) Costs below

Sanctioned offer

10.  Sanctioned offers are governed by Order 22 of the Rules ofthe High Court.  The costs consequence where a party fails to do better than the sanctioned offer is set out in Order 22, Rule 23.  This includes the Court ordering a party to pay costs incurred by the other party after the latest date on which the offer could have been accepted without requiring the leave of the Court, unless it is unjust to do so : Rules 23(3) and (5).  In considering whether it would be unjust to make the costs order, the Court is required under Rule 23(6) to take into account all the circumstances of the case including―

(a) the terms of any sanctioned payment or sanctioned offer;

(b) the stage in the proceedings at which any sanctioned payment or sanctioned offer was made;

(c) the information available to the parties at the time when the sanctioned payment or sanctioned offer was made; and

(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the payment or offer to be made or evaluated.

Insufficient information

11.  The reason why no order as to costs was made below is this.  The sanctioned offer was made on the day after the Financial Dispute Resolution (‘FDR’) hearing was held.  At that time the valuation of the two companies associated with the husband was not yet available.  The valuer in his report dated 5 November 2013 provided three bases of valuation and explained which basis he adopted.  In preparing the report, the valuer met the husband’s father on 26 September 2013 and was provided with certain information during the meeting and in subsequent e-mail correspondence and telephone conversation with the father and husband.  The report was then only supplied to the wife shortly before the trial. 

12.  In the light of this, while the wife was prepared to attend and did attend the FDR hearing (no doubt acting responsibly with the aim of achieving a settlement) it can hardly be said that she possessed all the information on the husband’s finance which would enable her to come to a concluded view on whether the sanctioned offer should be accepted.  The basis of the valuation clearly required it to be properly canvassed at the trial.  The husband on appeal went as far as to challenge the basis of valuation adopted by the trial judge and failed.  This lends further credence that the valuation of the husband’s finance was not a straight forward exercise.  Accordingly we ordered that there be no order as to costs below.

The tension

13.  I would like to make this further observation.  As the matter now stands, Order 22 applies to the family jurisdiction in Hong Kong.  Order 22 imposes discipline for responsible litigation.  But whilst the consequence of failing to meet sanctioned offers should be rightly recognized, it should also be recognised that unlike a commercial dispute, the fundamental philosophy in the family jurisdiction is to make proper financial provisions for a spouse (usually the wife) so that she could start afresh in life.  Other than a simple case, the financial interest of the parties may be complicated, particularly like the present case, where third party interest may be involved.  This underlying philosophy will be defeated if the costs that the wife has to pay by reason of her failure to meet the sanctioned offer will wipe out all or substantially all of her financial provision.  The effect of the costs order will destabilise the financial provision intended for her. 

14.  In my view the ‘justice of the case’ consideration under Rule 23(6) provides the basis for the Family Courts to resolve the tension between, on the one hand, litigation discipline and, on the other hand, the underlying philosophy of making adequate and meaningful financial provision for a spouse on divorce.

15.  I draw comfort that this is a concern not only of this Court but of the United Kingdom Family Courts where there are similar provisions on ‘without prejudice save as to costs’ offers.  The case of Norris v. Norris [2003] 1 WLR 2960 shows that the Family ProceedingsRules1991 governs such offers in the family jurisdiction.  Specifically, there are provisions on how the Court should consider whether it is unjust to award costs to the party whose offer was not beaten by the judgment.  The only difference with our Rule 23(6) is an additional clause (e), namely, ‘the respective means of the parties’.  Whilst our Rule 23(6) does not have the additional clause (e), my provisional view (since this matter was not fully argued before us) is that in the matrimonial context (and I am not dealing with the application of Order 22 in civil litigation generally) this is not a matter of significance because the Court is required in both jurisdictions to consider all the circumstances of the case in deciding on the issue of justice. Irrespective of clause (e), I do not see why Family Courts in Hong Kong are in any way restricted in ensuring that financial provision orders are to be given effect in substance.  This may well be a way forward before the implementation of the recommendations detailed by Poon JA are given effect. 

16.  Dame Elizabeth Butler-Sloss P stated this :

‘ 24 Rule 2.69D and its effect on rule 2.69B merit closer consideration. In rule 2.69D the court must take into account all the circumstances of the case including the list set out therein. This includes in (a) the terms of any offers. That must include counter-offers. It also requires in (e) the court to take into account the respective means of the parties. In my view, (e) enables the court to look at the whole position of the parties after the order has been made and see whether costs may fall disproportionately on one party rather than the other. It may enable a judge or district judge to mitigate to some extent the uncomfortable consequences of a Calderbank situation in a case where there is some but not a substantial amount of property and/or money to divide and costs will have to be paid from the available capital. The judge in such a case may make an order, often just enough to buy a suitable property for the wife, and then find that the effect of the Calderbank offers may totally destabilise his order. Equally, of course, the Calderbank process must have teeth which can bite. Both parties are under an obligation to engage in genuine negotiation with the other side, otherwise one party may have to be penalised in costs. In medium asset cases I do not underestimate the difficulties. Rule 2.69D does, however, give the court a greater latitude in making costs orders than may so far have been widely recognised.’ (emphasis added)

17.  She further stated this :

‘ 25 …… In my view, in some offer and counter-offer cases the proper approach might well be, under the present procedure, to make no order as to costs and leave each party to pay his/her own costs.’

Effect of the wife responsible for husband’s costs

18.  In this case the husband’s own costs below are about $3.66 million. The appeal costs are about $2.15 million and his costs between the date of our judgment and now are about $700,000. As for the wife, her own costs below are about $1.47 million, the appeal costs are about $1.04 million and the costs since our judgment are about $780,000.  These are huge sums for a case like this.  Mr Surman (together with Ms Tseng) for the wife indicated that if the wife is to be ordered to pay costs to the husband, she will suffer a loss of $2 million.  This may well be a matter that this Court can take into account in deciding whether it is unjust to make such a costs order.  But as indicated above, the reason why the no costs order was made in this case is because of the inadequate information possessed by the wife at the time of the sanctioned offer, hence it is not necessary to decide the case on this ground as well.

2)  Costs of the appeal

19.  It is not disputed that Order 22 does not apply to Court of Appeal proceedings.  Although the husband succeeded in reducing the amount of the wife’s entitlement, he failed in many of his challenges which we had dealt with in our judgment.  We considered no order as to costs of the appeal was the appropriate order.

3) Deduction of the MPS

20.  On 23 November 2012, H H Judge C K Chan ordered the husband to pay the wife MPS $110,000 per month until the FDR hearing.  In April 2013 the parties agreed on the continuation of the payment of the MPS.  Deputy District Judge Lo gave judgment on the wife’s financial provision on 6 February 2014.  He ordered the MPS to continue until the payment of the judgment sum.  The husband’s failed to obtain leave to appeal before Judge Lo and renewed his application before this Court on 11 November 2014.  He also applied for stay of execution of the judgment.  While the husband agreed to continue to pay the MPS from the money he deposited with his solicitors, there was no indication that such payment was to be treated as payment by instalment of the judgment sum as the basis of the stay of execution of the judgment.  Likewise, while the husband’s solicitors had mentioned in correspondence about deducting the MPS, it was never expressly mentioned that the MPS payments after judgment were to be treated as instalment payments of the judgment sum.  However, having said this, it is not the intention of our judgment of 3 July 2015 to extend the maintenance of the wife beyond a three year period.  The appropriate approach is to award interest to the wife for being kept out of pocket of the judgment sum of $6 million and allowed the MPS paid between the judgment and now to be deducted from the $6 million.

Hon Poon JA :

21.  I agree that for the reasons stated by Cheung JA in paragraphs 11 and 12 above, the wife should not be visited with the cost consequence of her failure to beat the husband’s sanctioned offer.  I also agree with his Lordship’s reasons for our decision on the costs of the appeal and deduction of MPS.  I would add a few words about the applicability of Order  22 to financial provision cases in family and matrimonial proceedings.

22.  In the Review of Family Procedure Rules – Interim Report and Consultation Paper issued in February 2014, the Working Party on Family Procedural Rules (of which I was the Chairman) said :

‘ 248. Due to the nature of financial order proceedings and the potential and possible outcomes thereof, there may be more scope and latitude for reasonable debate concerning the question of, for example, whether or not the eventual judgment is ‘more advantageous than’ the sanctioned offer, as compared to general civil litigation; similar to the manner in which orders for ‘costs in the cause’ for interlocutory matters are generally inappropriate in financial relief proceedings.

249. Careful thought will also need to be directed at the interplay, if any, between the mandatory ‘open proposals’ (or other optional open proposals voluntarily made) and sanctioned offers (which by their very nature are necessarily optional and elective) which may otherwise cause confusions to practitioners and/or parties.

250. The mandatory provisions and conditions in Order 22 were designed with general civil proceedings in mind, and careful thought will be required for necessary and appropriate modifications to be made, including for example, the matters which must be stated or provided for before there is a valid sanctioned offer and the conditions which must be fulfilled before the default consequences will follow, and which may be deemed as unsuitable or inappropriate in family proceedings.’

23.  For the reasons articulated, the Working Party proposed that sanctioned offers and sanctioned payments under Order  22 shall not apply in family proceedings (Proposal 65). Proposal 65 received support during consultation. Thus in the Final Report on Review of Family Procedure Rules issued in May this year, the Working Party formally recommended that the new unified procedural code for family and matrimonial proceedings should specifically stipulate that Order 22 shall not apply : see pp 68 – 72 of the Final Report and Recommendation 64. All the recommendations in the Final Report including Recommendation 64 were subsequently accepted by the Chief Justice.

24.  As illustrated by the judgments of Lam  VP and Cheung JA, applying Order 22 to a financial provision case is not always an easy or straightforward exercise.  If the matter has to be resolved in court, as is here, more costs will be incurred.  The uncertainty associated with how the court would ultimately resolve the matter and the further costs incurred really defeat the very purpose of invoking the statutory regime of Order 22.  For my part, I think a party and his or her legal advisers should think twice before resorting to Order 22.

CACV 234/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 234 OF 2014

(ON APPEAL FROM FCMC 6762 OF 2012)

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J U D G M E N T

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Hon Lam VP :

1.1  I respectfully agree with the judgment of Cheung JA which I have read in advance. In deference to arguments of counsel, I would add a few comments on how the needs of a party should be assessed in the post-LKW regime in the context of a short and childless marriage between young couples. The overarching consideration is fairness. Though the parties enjoyed a comfortable standard of living, this is not a case of the super-rich category. The major asset of the husband is his shareholding in a private family company in which he worked as a minority shareholder. On the evidence, it is unlikely that such minority sharing could be readily liquidated. As found by the judge, after they were married, the couples initially lived with the husband’s parents at a flat at Ocean View Court. The rent for that flat (paid by the parents) was $33,000 per month. After 21 months, the couple moved to a serviced apartment at Gateway at a monthly rental of $42,000. We must consider the fair distribution of resources upon divorce against such context.

1.2  As Mr Shieh SC submitted, in the absence of any exceptional circumstances it would not be fair to require a divorcing spouse to make life-long provision for the other spouse in a short and childless marriage between young couples (where none of them could be said to be super-rich).  This does not mean that we are reverting back to the pre-White cases in the 1980’s as discussed and rejected by Lord Nicholls in Miller v Miller [2006] 2 AC 618 at [54] and [55].  If there are matrimonial acquest acquired during the course of marriage, no matter how short the marriage is, the principle of sharing will be applicable.  Further, as my Lord shall explain later, in Hong Kong, the sharing principle is also applicable to non-matrimonial property though the short duration of a marriage will give rise to a good reason for substantial departure from equal division.

1.3  However, in the context of a short and childless marriage between young couples, in the assessment of needs, one must take account of how such needs arose.  See Miller v Miller, supra, per Baroness Hale at [138].

1.4  At the same time, I would not go as far as Deputy Judge Mostyn QC in Rossi v Rossi [2007] 1 FLR 790 at [91.8] where the learned judge derived a proposition that to justify a needs based award identification ought to be made of a causal connection between the need and the marital relationship.  As observed by Lord Nicholls at [11] in Miller v Miller, supra, there were needs which were not generated by the marriage which the court might take account in ancillary relief.

1.5  For my part, I respectfully find what Baroness Hale said at the end of [138] to be particularly illuminating,

‘ All couples throughout their lives together have to make choices about who will do what, sometimes forced upon them by [external circumstances], sometimes freely made in the interests of them both. The needs generated by such choices are a perfectly sound rationale for adjusting the parties’ respective resources in compensation.’

1.6  It follows that the longer the marriage, the greater the intermingling of the affairs of the parties to the marriage and the greater the claim for future needs of a longer period of time (or even life-long needs) to be taken into account in the fair distribution of the resources of the parties.

1.7  The corollary is that in a short and childless marriage between young couple, examining it through the prism of fairness, the claim for long-term needs of a divorcing spouse to be taken account will be weaker.  For young couple, there is always a possibility for each of them to remarry.  With the possibility of remarriage, there is also greater uncertainty in terms of changes in finance and personal circumstances.  Even without remarriage, the lifestyle pattern of each of them may change substantially in the years ahead.  Fairness dictates these inherent uncertainties should be taken into account in deciding the proper level for lump sum award.    

1.8  In the present case, the judge considered it reasonable to adopt 3 years’ capitalized maintenance on top of his award of $7.2 million for the purchase of a small flat to satisfy the wife’s accommodation needs.  With respect, I cannot agree with this approach.  No matter what the parties might have intended during the course of marriage, the fact remains that they had not purchased a matrimonial home in their joint names.  Nor had they lived at any property held under the name of one of them or their alter ego.  The judge did not consider in his judgment why the wish to purchase a matrimonial home was not materialized.  Nor did he consider how the notional purchase of a matrimonial home would impact on the overall financial situation of the husband and the value of the shares in the company he held.  In such circumstances, the award of $7.2 million is wrong in principle.  

1.9  However, since the wife had not been working throughout the marriage, I accept that her accommodation needs would have to be more generously interpreted and it should not be confined to three years’ rental of a suitable property. 

1.10  In the circumstances, we must exercise the discretion afresh.  For the reasons given by Cheung JA, I agree that the wife’s needs (including accommodation and other needs) in the present case shall be assessed at $5,500,000.  I also agree that there should be an additional award of $500,000 on account of sharing notwithstanding that the assets were largely non-matrimonial in nature.

Hon Cheung JA :

I.  The appeal

2.  This appeal is about the proper approach in making financial provisions for a spouse who divorced after a short marriage andthe parties’ joint assets consist almost exclusively of non-matrimonial assets of the other spouse.

II. The parties

1) The wife

3.1  The petitioner wife and the respondent husband are members of the local Sindhi Indian community.  Their fathers are businessmen.  Both of them were born in Hong Kong.  The wife is now 37 years old and the husband 39.  The wife left Hong Kong with the family at a very young age to live in Nigeria and then at age 11 she went to England to attend boarding school.  Eventually she graduated with a university degree from the City University of London and after a brief stay in Spain returned to Hong Kong.  Her parents are also living in Hong Kong.

2) The husband

3.2  The husband graduated from the Georgetown School of Foreign Service in Washington D.C., USA in 1996.  He then worked for an investment bank in New York and London.  Between 1999 and 2001 he worked between Hong Kong and London on his own project involving knitwear production. In 2001 the husband began to assist his father who operated a successful watch business in Tsimshatsui (‘the company’). 

3) The marriage and its breakdown

3.3  In July 2007 the wife met the husband in Hong Kong.  They were engaged in October of the same year and were married in July 2008.  The wife did not work after the marriage. 

3.4  After the marriage the couple lived in the home of the husband’s family in Ocean View Court, occupying the husband’s bedroom. They lived there until May 2010 and moved into a one-bedroom serviced apartment at the Gateway in Tsimshatsui rented by the company.

3.5  In July 2011 the marriage went into trouble. The husband moved back to his parents’ home in Ocean View Court while the wife remained at Gateway.  There were attempts at reconciliation but without success.  At the end of February 2012 the husband asked the wife to vacate from the Gateway flat immediately but she remained at the flat.  The Judge held that the marriage had by then irretrievably broken down.  The marriage lasted for about three years and seven months. 

3.6  In May 2012 the wife petitioned for divorce based on the unreasonable behaviour of the husband.  The divorce was uncontested and the decree nisi was pronounced on 23 July 2012.  The husband is now living in premises (Parc Palais) owned by the company.  A notional rent of $40,000 was charged in the company’s books for the husband’s occupation of this flat. 

III. The Decision

4.1  Deputy District Judge Simon Lo assessed the total value of the parties’ assets at $30.24 million.  This consists of

1) $30.03 million, representing the value of the husband’s 30% shareholding in the company;

2) $342,503.55 in the husband’s bank account; and

3) $339,318.10 as the husband’s entitlement in MPF pension.

4.2  $472,327.64 is to be deducted from these three sums which represented the borrowing of the husband from the company by way of loans. 

4.3  There are also jewelleries given by the parents to the parties which, for the purpose of this appeal, are not necessary to be taken into account.

4.4  The Judge then assessed the needs of the wife.  The Judge accepted that the wife was not career minded as she has never had a proper or formal job since her graduation from university.  She also cannot speak the local language which would affect her career development in Hong Kong.  Her plan is to enrol herself in training courses to be certified as a personal therapist and life coach and it would take two years for her to qualify.  The Judge held that it is reasonable to provide the wife with a 3-year capitalized maintenance.  For the first two years he awarded her $67,470 per month ($67,470 x 24 months) and for the third year he proceeded on the basis that the wife will qualify as a personal therapist and life coach with a earning capacity of $15,000 per month.  The maintenance for the third year would be ($67,470 minus $15,000)  x  12 months.  This will come to a round figure of $2.25 million.  On top of that the Judge held that the wife should be provided with a sum of $7.2 million to purchase a flat for her own accommodation, making her needs at a total of 9.45 million. 

4.5  As there will be excess from the joint assets after providing the wife with $9.45 million, the Judge held that the wife is entitled to a 33% share of the joint assets of $30.24 million.  He arrived at a round figure of $9,980,000.  That sum is to be paid within 28 days from the date of the decree absolute of the divorce.

IV.  The needs of the wife

1)  The issues

5.1  The husband challenged the decision both on the wife’s needs and her entitlement under the sharing principle.  Mr Shieh SC and Ms Rattigan for the husband narrowed the contentious issues on the wife’s needs to the following points :

1) the valuation of the company is wrong,

2) the valuation of the wife’s monthly expenses at $67,470 is wrong,

3) the award of $7.2 million to the wife for her to purchase a flat of her own is wrong.

2)  The open offer

5.2  The husband has made an open offer of money paying a lump sum of $3,074,375 to the wife.  The sum is already placed with the wife’s solicitors and has been used to pay the wife’s award of maintenance pending suit at $110,000 per month since November 2012.

3)  Valuation of the company

(1)  The expert’s view

5.3  The parties have appointed a single joint expert to prepare a valuation report of the company.  The company holds several landed properties including premises in Kowloon Centre, Tsimshatsui which are used as the office of the company.  The expert valued the company on three bases :

1) On a ‘break-up’ basis where the current owners break up and separately disposed of the assets of the company – the value of the company is HK$121.9 million;

2) On the basis where the business of the company continues to operate but the Kowloon Centre premises are disposed of  – the value is between $61.5 million to $100.1 million (and likely to be at the upper end of this range); and

3) On the basis where the business of the company continues to operate and the Kowloon Centre premises remain to be in use in perpetuity - the value is up to HK$35.8 million.

5.4  The Judge adopted the second basis of valuation.

(2)  Challenge to the second basis

5.5  Mr Shieh challenged the Judge’s adoption of the second basis because the father had indicated that he would not sell the Kowloon Centre premises which are mortgaged to the bank together with other properties of the company in order to obtain finance for the company.  He submitted that the proper basis of valuation should be the third basis.  This is also the line taken by the husband in the court below.  Ms Rattigan who appeared on her own below for the husband had expressly put to the expert in cross-examination that the proper basis should be the third one because the father who is the majority shareholder had expressed the view that he would carry on the business and would not sell the Kowloon Centre premises.

5.6  The expert disagreed that he would automatically select the third basis as the basis of valuation.  He referred to the fact that the company is a small company with management and shareholders being one of the same and in such circumstances one would not assume that the company is going to keep using the Kowloon Centre as an asset into perpetuity.  This is what he said :

‘ I think that if the court was to find that the business was going to operate in the long term in the way it’s currently operating, that would take us to basis two and three as opposed to one because those two are on a going concern basis. I am not sure that I'd automatically select three rather than two, I think that requires a bit of further consideration. The advantage, well, the reason one might lean towards two is if you think that at some point some value is going to be realised from this Kowloon Centre property asset. You would only go for three if you thought that it was really going to be locked up in this business into perpetuity and that’s quite a long time frame when you’re looking at a small business. You know, when you’re looking at large businesses where the management is independent from the shareholders then they might continue their operations for decades, decades, sometimes, you know, hundreds of years there are companies that have been doing the same thing. When you’re looking at smaller companies and management and shareholders are often one of the same, I’m not sure you would assume that this business is going to keep using this space as an asset into perpetuity.’

5.7  In further response to the same question, the expert said :

‘ As I say, I would if the court finds that the appropriate basis is to assume that the company will continue to operate as a going concern, that will take us to two and three and I think that would take you a little bit away from basis one unless you were valuing a 100 per cent of STL in which case you have to bear in mind that a new owner would still have the option to do that. But if we’re talking about what is actually going to happen with the business and we’re making the assumption it’s going to continue to operate and we’re saying what is then the value in the hands of the current owner, that takes you to two and three. The distinction between two and three is, I think three is appropriate if you assume that the business is never going to realise value from its Kowloon Centre property as a separate asset so it’s always going to continue to use it as an office. If it’s doing that into perpetuity then that’s always being used just to generate the profits of the business every year, it’s never generating the other value. If you assume that at some point in the future, it could even be five years away or 10 years away, they might do something else with it then that takes you to basis two.’

(3)  My view on the second basis

5.8  In my view the Judge was entitled to adopt the second basis of valuation.  The first and third bases are clearly extreme situations : the first one involves a breaking-up of the business immediately and the third one involves the use of the Kowloon Centre premises in perpetuity.  Between these two extremes the expert was clearly entitled to adopt a middle course and valued the company on the basis that eventually the Kowloon Centre premises may be disposed of. 

5.9  In my view the expert had not ignored relevant factors or taken irrelevant factors into account when he considered the nature of the company which is a small private company with the management and shareholders being of the same people and that at some stage down the line, there may well be a disposal of its assets.  This is an assessment taking into account eventualities which he was clearly entitled to do.  The possibility of disposal is reflected by the fact that the father is now 68 years old, the husband has been a responsible son who has been involved with the operation of the company for a substantial period of time.  The husband has also branched out into some other businesses of his own.  Eventually it will come a time when the father may handover the rein to the son and the father’s idea of not selling the company assets may well be subject to further consideration.  While the assessment of the value of the shares in the company is based on its current value, inevitably the expert also needs to assess the chance of something which may happen in the future.  In my view the expert’s view on the second basis cannot be faulted.  The Judge’s adoption of the second basis is likewise correct.

5.10  It should be pointed out that the two figures set out in the calculation of the second basis are not exactly a range of figures but figures based on two methods of valuation. 

(4)  Valuation for minority shareholding

5.11  Another issue on valuation is whether the expert, apart from giving a 20% discount to the valuation by reason of the company being a private company, should also give a discount because the son is a minority shareholder in the company. 

5.12  Mr Shieh relies on the view indicated by another judge who dealt with the pre-trial review of this case that he would usually give a further discount in minority shareholder situation.

(5)  The expert’s view

5.13  The expert had explained that he had already proceeded on the basis of the valuation of a minority shareholding respectively of a public company and a private company and he had applied a discount to reflect the difference between the public and private company.  The expert explained that he would not give a further discount for minority shareholding :

‘ I wouldn’t apply a further discount. I think that that discount combined with the fact that you are - I think that’s taken account of by 1) the fact that I’ve already got this discount, and secondly, the fact that I say that basis one doesn’t apply. The reason that you apply, that discounts are sometimes applied to minority shareholdings particularly in unlisted companies is that you don’t have control and therefore you don’t have the ability to ensure that the assets of the company are put to the most, the best economic use and that’s the difference between basis one and basis two or three, that the highest economic use seems to be basis one, as a minority shareholder you can’t force that use and therefore you potentially drop to basis two or three if you’re looking at minority valuation. That is, if you like, a minority discount. I wouldn’t apply a further discount on top of that.’

(6)  My view on further discount

5.14  What the expert had said was that no further discount should be given because a minority shareholder has no power to decide how the company is to be run and the second and third bases of valuation had already reflected this minority element.  I agree with his view.  In any event the principle is that there is no rule of general applicability that the value/price of a minority shareholder in a private company should be discounted to reflect the fact that the shares are a minority shareholding.  The whole of the facts surrounding the shareholding had to be considered in order to decide the extent to which, if at all, any discount is appropriate.  In particular in a situation where the company is a quasi-partnership it is artificial to apply a discount : see Nourse J in In Re Bird Precision Bellows Ltd [1984] 1 Ch 419.

5.15  In this case the father and the husband are the only two shareholders in the company.  The analogy of a quasi-partnership is appropriate.  Further, it is unlikely that the husband is forced to sell his 30% interest in the open market in circumstances in which a discount would be forced upon him.  Either the husband’s shareholding will be sold at the same time as the father’s shareholding or it will not be sold at all, if this happens the husband would get full value of his shares, see Coleridge J in G v G (Financial Provision : Equal Division) [2002] 2 FLR 1143 at 1151 and also APD v RD [2013] N I Fam 7 (High Court of Northern Ireland, Family Division).

4)  The wife’s expenses

5.16  Although Mr Shieh does not challenge the three-year period that the Judge had awarded for the wife’s maintenance, he challenged the Judge’s decision on the amount of $67,470. 

5.17  Mr Shieh criticised the wife’s claim to be mere assertions because of the lack of documentary support for her claim.  In so far as there were receipts produced by her, there was no attempt to correlate the receipts.  The husband had commissioned a company John Lees and Associates (‘JLA’) to prepare an analysis of the parties’ bank and credit card statements with a view to showing the amount of the wife’s expenses covering the pre-separation period from 1 February 2010 to 27 July 2011 and the post-separation period 28 July 2011 to 31 December 2012.  The analysis showed that the wife’s monthly expenses were $42,000.  

5.18  The Judge held that the analysis is problematic and inaccurate.  The problem lies with the incomplete information provided by the husband to JLA.

5.19  The wife claimed her monthly expenses to be at $118,470 inclusive of rent at $51,000.  After deducting the rent, her expenses were $67,470 a month.  She was awarded maintenance pending suit at $110,000 per month since 25 November 2012.  In my view the expenses she claimed to have spent are more or less within her means.  From the receipts of expenses of the wife one can indeed see that there were cash transactions which were not reflected in the analysis.  In the circumstances the Judge was correct to hold that the JLA report should not be used as a proper basis to gauge the wife’s expenses.  In my view the Judge’s acceptance of the wife’s claim that she spent $67,470 per month cannot be regarded as plainly wrong which will require intervention by this Court.  

5)  Provision for a $7.2 million flat

(1)  Rental or purchased flat?

5.20  The real difficulty lies with the Judge’s award of $7.2 million to allow the wife to buy a property for her to live.  Mr Shieh argued that the Judge was wrong to make a lifelong provision for the wife. Instead the Judge should have only allowed the wife a capitalized sum representing the rent she may have to pay during the three year period before she could establish herself on her own.

5.21  Mr Burns SC (together with Mr  Surman and Ms Tseng) for the wife argued that the Judge was correct to award this sum for the following reasons :

1) An outset of and during the marriage the intention of the parties (and of the husband’s parents) was that they would have the security of living in purchased accommodation within the ownership of the company;

2) This was, in effect, the promise made to the wife’s parents by the husband’s parents prior to the parties’ marriage;

3) The flat at Parc Palais was purchased by the company with the intention of providing it to the parties as their matrimonial home; and

4) On any basis, the husband’s suggestion that the correct approach in relation to the wife’s accommodation needs was to have included an element of rent into an award of three years’ capitalised maintenance ignores the wife’s accommodation needs beyond such a period and the reality that the wife would be unable to fund rental obligations from her anticipated income which the learned judge found to be no more than HK$15,000 per month.

5.22  Mr Burns submitted that it was reasonable for the Judge to accept the wife’s estimate of the cost of purchasing a 700 sq. ft. flat at HK$7.2 million as her residence because the Judge was entitled to accept this as a reasonable figure bearing in mind the wife’s home search during the marriage and her active communication with real estate agents and interior designers.  Further the Judge was entitled to take judicial notice of the approximate property prices in the Hong Kong residential property market.

(2)  My view on accommodation

5.23  The Court of Final Appeal has stated in LKW v. DD (2010) 13 HKCFAR 537 at 564 to 565 that the parties’ needs should be generously interpreted. 

5.24  Section 7 of the Matrimonial Proceedings and Property Ordinance (‘MPPO’) (Cap. 192) requires the Court to consider all the circumstances of the case in making orders for ancillary relief, namely, the financial needs, the standard of living enjoyed by the family before the breakdown of marriage, the age of the parties and some of the relevant factors identified in section 7(1).

5.25  In this case the parties no doubt had enjoyed a luxurious standard of living during their marriage and there were discussions about the couple having a flat of their own, but at the same time the length of the marriage must also feature prominently in the assessment of the wife’s needs as well.  After all the Court is required to consider all the circumstances of the case in deciding how the powers conferred on them should be exercised.

5.26  In the recent case of YN also known as YN(A) v. NA (CACV 236/2013) (judgment dated 24 November 2014) this Court made the following observation :

‘ 5.18 As mentioned by this Court during the hearing, there are smaller size flats in Hong Kong in respectable residential areas at the costs of HK$3 to 4 million. And as the costs of purchasing an accommodation in Tokyo is at least 40% cheaper than in Hong Kong, the HK$5 million provision for the wife’s accommodation is indeed a generous one and is supported by evidence.’

5.27  In this case the wife is a single young woman.  Whilst accepting that the Court’s priority is to ensure that the wife should have a roof over her head on divorce, in my view, in the context of this case, the Court will err on principle if it regards a lifelong provision of accommodation for the wife (in the form of a purchased flat) is the only means to meet her needs.  Likewise, the amount to be awarded should be kept in proper perspective on account of the length of the marriage, the age of the wife and the need for her to establish her own life again after divorce.  In this case, my view is that a sum of $3.25 million is more than adequate to satisfy the accommodation needs of the wife.  In arriving at this figure I have also considered that the wife has been guilty of material non-disclosure in respect of her financial resources.  This is in respect of the existence of two bank accounts held by her in India which at the trial below she had not provided answers for her failure to disclose such accounts.  This non-disclosure is not relied upon in order to punish her but rather she only has herself to blame by reason of her non-disclosure if she thinks that this sum is inadequate for her accommodation needs.  The sum of $3.25 million together with the sum of $2.25 million for her maintenance would make up a total sum of $5.5 million.

V.  Sharing of the joint assets

1)  The Judge awarded 33%

6.1  The Judge considered that there is excess money in the matrimonial pot after the needs of the wife at $9.45 million is satisfied.  He then proceeded to consider the sharing principle.  The Judge considered that under the sharing principle the wife should be entitled to 33% of the joint assets of $30,240,000, namely $9.98 million. In so doing the Judge considered the case of WLK v. TMC (2010) 13 HKCFAR 618 in which the Court of Final Appeal awarded 32% of the joint assets of the parties to the wife of a short marriage which lasted 31 months before their separation, although they had a 12-year relationship before the marriage.

2)  Non-matrimonial assets

6.2  The husband’s 30% interest in the company was not acquired by him during the marriage.  When the parties married he already has had this 30% share.  There is no serious argument that the husband’s 30% in the company is regarded as non-matrimonial assets.  While non-matrimonial assets can be used to satisfy the needs of a spouse, when it comes to sharing, there are differences in views in how they should be applied in regard to the equal division principle.  The rationale why non-matrimonial property should be looked at differently is because it represents an unmatched contribution by the party who brings it to the marriage, see Rossi v Rossi [2007] 1 FLR 790 at paragraph 24.6

6.3  Although non-matrimonial assets may lose its significance in a long marriage, it certainly has a material bearing in terms of a short marriage.  As Lord  Nicholls of Birkenhead observed in Miller v Miller [2006] 2 AC 618, in the case of a short marriage fairness may well require that the claimant should not be entitled to a share of the other’s non-matrimonial property.  The source of the asset may be a good reason for departing from equality.  This reflects the instinctive feeling that the parties will generally have less call upon each other on the breakdown of a short marriage [paragraph 24].

6.4  Mr Shieh referred to K v L (Non-matrimonial Property: Speial Contribution) [2011] 2 FLR 980 where Wilson LJ stated that :

‘ [21] …..By contrast, although non-matrimonial property also falls within the sharing principle, equal division is not the ordinary consequence of its application. The consequences of the application to non-matrimonial property of the two other principles of need and of compensation are likely to be very different; but the ordinary consequence of the application to it of the sharing principle is extensive departure from equal division, often (so it would appear) to 100%–0%. …..

[22] …..What was much more interesting was the moment during the hearing when we asked Mr Pointer to show us a reported decision in which the assets were entirely non-matrimonial and in which, by reference to the sharing principle, the applicant secured an award in excess of her or his needs. He confessed to be unable to do so. Such a decision will no doubt be made – but not in this court today.’

6.5  In S v AG (Financial Orders: Lottery Prize) [2011] EWHC 2637 (Fam); [2012] 1 FLR 651, Mostyn J stated that :

‘ [7] Therefore, the law is now reasonably clear. In the application of the sharing principle (as opposed to the needs principle) matrimonial property will normally be divided equally (see para [14] (iii) of my judgment in N v F (Financial Orders: Pre-acquired Wealth)). By contrast, it will be a rare case where the sharing participle will lead to any distribution to the claimant of non-matrimonial property. Of course an award from non-matrimonial property to meet needs is a common place, but as Wilson LJ has pointed out, we await the first decision where the sharing principle has led to an award from non-matrimonial property in excess of needs.’

6.6  In PW v. PPTW (CACV 224/2013) (judgment dated 12 March 2015) this Court referred to the two different approaches of the English Courts concerning the sharing of non-matrimonial property.  Under the first approach, the Court simply adjusted the percentage from 50% to take into account non-matrimonial property. This is identified in cases such as Charman v. Charman (No. 4) [2007] 1 FLR 1246.  The second approach shown in cases such as N v F(Financial Orders : Pre-Acquired Wealth) [2011] 2 FLR 533 is to identify the scale of the non-matrimonial property to be excluded, leaving the matrimonial property alone to be divided in accordance with the equal sharing principle.  This would require the Court to consider whether the existence of pre-marital property should be reflected at all.  This depends on the question of duration and mingling.  If the Court decides that the fraction is fair and just, the Court should then decide how much of the pre-marital property should be excluded. 

6.7  This Court noted in PW that :

‘ ….. the Law Commission Report on Matrimonial Property, Needs and Agreements, Law Com No 343, 26 February 2014, chapter 8, §8.81, in which the Law Commission in England expressed the view that the two-stage approach (simply to exclude the non-matrimonial property from the calculation) is preferable, “for the sake of clarity and because it may encourage settlement because it obviates the need to guess what proportions a judge would apply to the property once its nature as non-matrimonial has been established”. [Paragraph 65]’

6.8  This Court, however, refrained from deciding which approach is to be preferred.  Apart from stating that the first approach is what the Court of Final Appeal had decided in WLK and restated in TCWF v LKKS & Ors [2014] 1 HKLRD 896, this Court said :

‘ …Since the discretion is unfettered and the factual matrix of each case would be different, the approach of Mostyn J [in N v F] should only be regarded as an illustration of how the discretion could be exercised as opposed to laying down a formula which should be followed mechanically in every case. There may well be factors which are not relevant in the previous cases which have to be considered on the facts and circumstances of another case. [paragraph 70]’

6.9  Personally I do not find the argument in the English cases about which is the preferred approach helpful.  More importantly the Court of Final Appeal has already given guidelines on how non-matrimonial property should be dealt with under the sharing principle in a short marriage which I will deal with in the following paragraphs.  Hence the starting point of excluding the matrimonial property from consideration will be contrary to the Court of Final Appeal judgment which this Court must follow.  But for the purpose of discussion, my view is that the second approach which may eventually include the non-matrimonial assets should not be regarded as the touchstone to the solution of the problem.  Words such as ‘insufficient logical rigour’ or ‘risk of palm-tree justice’ used by the proponents of the second approach to criticise the first approach are really, with respect, not helpful at all.   This is after all a discretionary relief to be exercised by reference to well defined perimeters and established principles.  Further, under the second approach the determination of how much of the non-matrimonial property is to be included is very much a discretionary decision as well.

3)  The guideline in WLK

6.10  The Court of Final Appeal in WLK (per Riberio PJ at paragraph 83) disagreed with the trial judge’s view that the sharing principle was inapplicable because of the shortness of the marriage and because of the lack of marital acquest.  Instead, it held that :

‘ 84. ……The better approach is to regard the sharing principle as always applicable when there are assets surplus to needs but accepting that, as part and parcel of that principle, an equal division should indeed be departed from if good reason exists for so doing. The shortness of a marriage, the absence of marital acquest and similar matters can all be considered as possible reasons for such a departure. The circumstances of a particular case may lead the court to decide, for example, that equal division should be departed from to the extent of restricting the award to a sum sufficient to meet one of the parties’ needs. But that is not to say that the sharing principle has been “displaced”.’

6.11  The Court of Final Appeal awarded, on top of the wife’s needs, an extra 2% to reflect the wife’s contribution and 3% as compensation.  In respect of compensation the wife had given up her career ambition as a concert pianist in order to fall in line with the husband’s wish in contemplation of them getting married.  In respect of contribution, the Court of Final Appeal stated that :

‘ 129. During that time, the wife complied with the husband’s wishes that she should accompany him on his frequent business travels; kept her mother-in-law and sisters-in-law company; and so forth. If she did not make innovative contributions of her own, this was at least in part because, as the Judge accepted, she “was never expected to be anything other than as a wife at home”. And if she did not have a household of her own to take charge of, that was because they had decided to reside in the home of the husband’s parents initially without telling them that they had got married. That is not the same thing as saying that she had made a “zero” contribution to the marriage, relatively short though it was. It is true that it was a turbulent relationship, but that does not justify ignoring its positive aspects. There were quarrels, but also reconciliations, “downs” but also “ups”.’

4)  My view on sharing

6.12  In this case, I have indicated that an award of $5.5 million should be made for the needs of the wife.  In terms of the wife’s contribution, she was performing very much the same tasks as the wife in WLK. However, I do not consider that the 2% for contribution adopted in WLK was intended to be applied as a formula.  Inevitably the extent of contribution in each case is different.  In this case the appropriate amount is $500,000.  The final award to the wife is $6 million.  This is about 20% of the total joint assets.  The issue of compensation does not arise in this case.

6.13  Mr Burns submitted that the Judge had followed the various steps identified in LKW and the final figure he arrived at is within the ambit of his discretion.  In my view ultimately the question is whether the discretion had been properly exercised in accordance with principles.  In this case the Judge had indeed erred on principles which called for this Court to exercise the discretion afresh.

VI. Resource of the husband

7.1  Mr Shieh submitted that the income and capital of the husband are limited.  The money he obtained from the company is by way of loans from the company with obligations for repayment. Any order made by the Court in excess of the husband’s financial means would in effect have to be met by the husband’s father who controls the purse.  This harks back to the ‘judicious encouragement’ approach which the Court of Final Appeal has expressly disapproved of in KEWS v NCHC [2013] 2 HKLRD 314.

7.2  Mr Burns on the other hand relied on the following statement in Thomas v Thomas [1996] 2 F.C.R. 544 at 552 that,

‘ The court was confronted by a husband with immediate liquidity problems but possessing substantial means. He was proposing that the court should make a capital order which would extinguish for ever all claims by the wife to capital relief from him or his estate. The order that he was suggesting was paltry when measured against his total resources and expectations, assessed in the broad terms which the Act requires. On such a husband a heavy onus lay to satisfy the court that all means of access to liquid funds to support suitable outright provision for his wife had been thoroughly explored and found to be impossible. If he failed to demonstrate that, he ran the risk of having the inference drawn against him that ways and means could be found of funding suitable provision for the wife’s capital needs.’

7.3  In my view, the ‘judicious encouragement’ approach has not been resurrected to life again.  Rather as Ma CJ observed in KEWS the Court had to look at the reality of the situation and have regard to matters of substance and not just form.  In looking at reality, it could take into account not only what a party actually had, but what might reasonably be made available to him or her if a request for assistance were to be made.  As to what might occur in the foreseeable future, past conduct was often a useful guide.  In this case the husband is actually a working son in the company in which he has a 30% share.  The only other majority shareholder is his father.  The only other sibling is the sister who has no share in the company.  The husband’s lifestyle has always been funded by the company.  While the funding is by way of borrowings from the company, one may ask how likely it is that the father would actually call for the loans to be repaid by the son? The reality is that the husband plainly has the financial resources to meet the order of financial provision for the wife.

VII.  Conclusion

8.  I would allow the appeal to the extent that the sum of $6 million would be substituted as the final award for the wife.

Costs

9.  The parties are required to submit written submissions within 14 days on costs.

Hon Poon J :

10.  I agree with both the judgment of Lam VP and the judgment of Cheung JA.