25 December 2022

Family Law Risk Advisory Series | Responsible family asset protection: lessons from Asia’s HK$1.2 billion divorce award: when aggressive strategies can backfire

Marcus Dearle

The Family Law Committee of the International Bar Association is focusing on the importance of using pre- or post-nuptial agreements. Miles Preston supports this initiative which is part of the Committee’s Family Law Risk Advisory series – embracing the lessons of  family law cases that are reported in the media

In this post, we look at the lessons of the biggest divorce case in Hong Kong in which Marcus Dearle acted for the wife whilst he was at Withers in London and Hong Kong

In April 2018 Marcus Dearle published an article in Family Law [2018] Fam Law 420 concerning a case in which the post-nuptial agreement (PNA) was secretly cancelled by the spouses

He stated in the article:

“Do not disregard the lessons of the cancelled PNA. Lawyers who routinely advise their clients to make it a rule that they should disinherit their children if they (their children) refuse to enter into a pre-nuptial agreement or a PNA may want to reappraise their advice: it is this type of scenario which leads to secret cancellations of the agreements. As a deterrent, practitioners should consider including a ‘think carefully’ clause in all pre-nuptial agreements and PNAs requiring the financially stronger party to obtain independent legal advice from a family law specialist before the agreements are amended or terminated.”

The key over-riding lesson for the financially stronger party in high value cases: always get a pre- or post-nuptial agreement

Marcus Dearle’s article as published:

On 1 December 2011, in the Hong Kong High Courtcase of TCWF v LKKS [2014] HKEC 15932 , Saunders J handed down his judgment (HCJ) that was reported at the time as being Hong Kong’s biggest ever litigated divorce award in the international media. The trial was held in the main in open court and the conduct and lifestyles of the wife, the husband and his fatherbecame a matter of international public scrutiny. This was a case where the security threat was real: there was a kidnap attempt on the couple’s daughter (and her maternal grandmother) five months after the judgment4 . It is probable that the publicity played a material part in triggering the kidnap attempt.

Vital lessons were to be learnt on both sides – lessons which are equally likely to apply in England and Wales and other jurisdictions as well as Hong Kong. There is the publicity lesson: if the kidnap attempt had not been foiled for instance, would the vast wealth, and the apparent glitziness and allure of a (literally) jet-set lifestyle in the case which attracted the media interest, then have mattered a jot?

The asset protection and litigation conduct lessons also need to be considered. From an asset protection perspective, the father and the husband had in fact started strongly. They had taken responsible initial asset protection steps prior to the marriage with the completion of the corporate ‘Framework Agreement’ which ultimately proved to be an effective asset protection vehicle – and which was intended to be completed in tandem with a pre- or post-nuptial agreement. But they should have stopped there. It was the aggressive litigation steps taken after the divorce petition had been issued in Hong Kong – in particular the decision to embark on satellite High Court litigation in England and later Hong Kong – which resulted in significant damage being caused to the husband and father’s case. That damage was wholly avoidable.

The Chancery Division judgment in London from Briggs J (as he then was) for instance – dismissing the fraudulent misrepresentation proceedings commenced by the father against the wife5 , which was critical of the father, was inevitably going to be noticed by the Hong Kong trial judge – as turned out to be the case – exacerbating Saunders J’s negative impression of the father and the husband. Note Briggs J’s observation which was quoted in Saunders J’s judgment:

‘…(the father) has made no secret of the fact that he hopes and expects that the damages he seeks to recover for the alleged fraud from the wife will be more than sufficient to soak up anyfinancial provision which she might recover in the Hong Kong divorce proceedings from his son…7 ’

The original award was HK$1.2 billion8 . Following a further three years of litigation in the public gaze through the Court of Appeal to the Court of Final Appeal, the award was reduced significantly.

In around March 1999 the husband’s father gave the husband approximately US$50 million. On 26 June 1999 the father and husband signed the Framework Agreementwhich gave rights to the father to recover from the husband property in Japan that had been acquired as a result of the gift. Between 1999 and 2008 the son turned the father’s gift of US$50 million into very substantial assets predominantly in Tokyo commercial real estate. The wife married the husband on 8 January 2000. The couple had met at university in the UK. On 5 June 2000 he and the wife signed a post-nuptial agreement (PNA)10 . The PNA was signed, but unbeknownst to the father, on the same day the husband and his wife signed a deed of cancellation11 .

On 27 May 2008 the wife issued divorce proceedings in Hong Kong. On 21 August 2008 the husband demanded from the wife a copy of a convertible loan agreement he called the 2006 CLA 2 (2006 CLA) he claimed was among papers retained by the wife12 . The wife immediately asserted that she did not believe such a document had ever existed13 . The wife was aware of the existence of the Framework Agreement14 .

On 4 November 200915 the father brought the proceedings against the wife in the Chancery Division of the High Court in London mentioned above ‘alleging a conspiracy between the husband and wife of fraudulent misrepresentation in relation to the cancellation of the PNA’. On the same day, they executed documents prepared by the father’s solicitors ‘purportedly acting pursuant to the Framework Agreement (including the Special Articles) and the 2006 CLA’16 . The effect of the documents they signed was ‘substantially [to] deplete the capital of the husband by shifting the legal and beneficial ownership of the Japanese business from the husband into the hands of the father’17 . This day of legal action was called ‘D-Day’ by the father and the husband18 .

The wife immediately responded with an application pursuant to s17 Matrimonial Proceedings and Property Ordinance in Hong Kong (similar to the provision provided for under s37 of Matrimonial Causes Act 1973 (England & Wales)) asking for the ‘D-Day’ dispositions to be set aside. The fraudulent misrepresentation proceedings were later dismissed on 30 March 2010 by Briggs J on the ground of forum non conveniens.

The father and son then launched identical proceedings against the wife in the Hong Kong court again alleging fraudulent misrepresentation19 . On 23 February 2011 the fraudulent misrepresentation and s17 proceedings were abandoned by the father and the husband and compromised entirely in the wife’s favour, with the father and husband agreeing to set aside the ‘D-Day’ orders and pay the wife’s costs on an indemnity basis20 . Saunders J also directed that the trial should be held in open court. The month-long trial began on 10 October 2011. Saunders J handed down his judgment on 1 December 2011.

The media reported details of the family’s lavish lifestyle on a daily basis: assets included a Boeing 737 Business Jet (BBJ), high value residential properties in England and San Francisco, two Pershing motor yachts (one 115 feet and the other 88 feet), a fleet of luxury cars in London, Tokyo and San Francisco. Saunders J found that the couple’s lifestyle ‘was probably best described’…’as “just below billionaire class” ‘21 and:

‘[I]n the period between 1 May 2008 and 31 March 2011, a little under 3 years, the husband’s records show that his personal spending amounted to some US$68 million. Amongst other things, in that period the husband spent over HK$7 million on cars. He spent HK$194 million on aircraft. He spent HK$4 million on jewellery. He spent HK$60 million on wine. He spent HK$197 million on motor yachts. That spending amounts to a total of HK$463 million or US$59.2 million.’22

He also criticised a number of strategies adopted by the father and the husband: he stated that the case that the husband could not produce the desk top bank valuations for the Tokyo commercial properties was ‘unbelievable beyond belief’23 . He referred to the fact that the husband ‘even went so far as to say that he did not have copies of the valuations’24 . He also criticised the husband’s valuer of the BBJ who, ‘… could not…in any sense be described as an independent expert. He was obliged to acknowledge that the firm that he operated was paid between US$2 million and US$6 million a year to maintain and operate the BBJ’25 . He also made findings of forgery and perjury against the father and husband26 sent the judgment to the Director of Public Prosecutions (in Hong Kong) ‘for such action as he may think appropriate.’27

Over the next three years, the case went through the appeal process, from the Court of Appeal and on to the Final Court of Appeal. The Court of Appeal’s ruling was upheld by the Court of Final Appeal28 , substituting the HK$1.2 billion award with the lower award of HK$411.75829 million based on the wife’s needs, generously interpreted. The Court of Appeal found that Saunders J was wrong not to have taken into account that the son’s rights in the companies owning Tokyo properties were still subject to his father’s adverse rights under the Framework Agreement and Special Articles30 . Saunders J’s findings of perjury and forgery against the father and son were set aside31 .

  1. Avoid publicity. Family Arbitration (in England & Wales) or Family Adjudication (in Hong Kong32) preserving confidentiality is a better alternative.
  2. Satellite litigation will often prove to be counter-productive as it was in this case.
  3. Lawyers should be prepared to say ‘no’ – and be seen to be saying ‘no’ – to their clients. And get the simple issues right: ‘independent’ experts need to be independent.
  4. Be reasonable, sensible and responsible from the outset. If the father and the husband had co-operated and simply acknowledged service of the divorce petition, prepared a carefully completed Form E with a full set of supporting documents – including reference to the Framework Agreement – and simultaneously put forward a realistic financial offer for settlement – reputational damage could have been avoided.
  5. Do not disregard the lessons of the cancelled PNA. Lawyers who routinely advise their clients to make it a rule that they should disinherit their children if they (their children) refuse to enter into a pre-nuptial agreement or a PNA may want to reappraise their advice: it is this type of scenario which leads to secret cancellations of the agreements. As a deterrent, practitioners should consider including a ‘think carefully’ clause in all pre-nuptial agreements and PNAs requiring the financially stronger party to obtain independent legal advice from a family law specialist before the agreements are amended or terminated.
  6. Corporate/family asset protection vehicles. The Framework Agreement worked – finally – in the case. The Hong Kong Court of Appeal held that, ‘… it was not against public policy for a third party to structure a bona fide business transaction with a husband or wife (whether before or after marriage) so that in the event of divorce certain rights would become enforceable’. Consequently, in addition to the standard asset protection vehicles of pre-nuptial agreements and PNAs and dynastic trusts – consider the option of using corporate/family asset protection vehicles in other cases as a further level of – responsible – asset protection.

Footnotes

1     The Court of First Instance.

2    The author led the team representing the wife in the London Chancery Division High Court litigation and at the trial in Hong Kong.

3     The father was also a party to the divorce and financial proceedings.

4     Reported in the South China Morning Post (in Hong Kong) on 27 April 2012.

5     A solicitor qualified in Hong Kong.

6     The author’s emphasis.

7     Paragraph 31 High Court judgment (HCJ)

8     Paragraph 498 HCJ. Equivalent to approximately £109m at current exchange rate.

9     Paragraph 9 HCJ.

10     Paragraph 12 HCJ.

11     Paragraph 13 HCJ.

12     Paragraph 26 HCJ.

13     Paragraph 26 HCJ.

14     At paragraph 18 of the Court of Appeal judgment – [2014] HKLRD 896 and [2014] HKEC 47 (CAJ) – the court stated that the ‘wife had participated in the drafting of the Framework Agreement, and she incorporated the Special Articles of association of the companies.’ At paragraph 14 of the CAJ the court also stated that the wife was ‘effectively the in-house legal counsel for the structure. She was deeply involved in drafting various documents for the business, and was involved in the financing and refinancing of the [Japanese] business, including reviewing loan documentation.’

15     Paragraph 29 HCJ.

16     Paragraph 27 HCJ.

17     Paragraph 28 HCJ.

18     Paragraph 27 HCJ.

19     Paragraph 33 HCJ.

20     Paragraph 40 HCJ.

21     Paragraph 357 HCJ. The Court of Appeal later found that Saunders J had calculated the husband’s assets at too high a level.

22     Paragraph 370 HCJ.

23     Paragraph 241 HCJ.

24     Paragraph 239 HCJ.

25     Paragraph 292 and 293 HCJ.

26     Paragraph 514 HCJ.

27     Paragraph 515 HCJ.

28     The last Court of Final Appeal judgment in the case was handed down on 10 February 2015.

29     Paragraph 380 CAJ. £37.68 million at current exchange rate.

30     Paragraph 224 CAJ.

31     Paragraph 77 CAJ.

32     Family Adjudication was not available in Hong Kong at the time of the trial

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