May 2023

Hong Kong

Law Over Borders Comparative Guide:

Family Asset Protection: Divorce, Finance and the Media

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Contributing Firm

Introduction

It is has been firmly established in England and Wales and Hong Kong for many years that assets held in a discretionary trust are at risk of attack in divorce proceedings if either or both of the parties are beneficiaries of the trust. As reported court decisions in the court of England and Wales are regularly followed in Hong Kong and the law and procedure in connection with financial remedies cases in both jurisdictions is similar, the reader should read this chapter together with the England and Wales chapter: issues relating to submission to the jurisdiction, for example, are dealt with in more detail in the England and Wales and the law and procedure is essentially the same. One highly important area to focus on, however, where the law and procedure is both very different, is in the section on media issues.

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1 . Divorce and trusts

Trusts have been a feature of common law jurisprudence for centuries and are fully recognised in Hong Kong. The legal basis of trusts and the laws governing their operation are well established and understood. A trust is not, itself, a separate legal entity. It is, in essence, an arrangement whereby one person (the “settlor”) gives away the enjoyment of assets to a group of individuals (the “beneficiaries”, which will often include the settlor himself) while control of the assets and decisions on the administration and investment of those assets lies with others (the “trustees”) who are bound by fiduciary duties in their dealings with both the assets and the beneficiaries. The principal terms by which the trustees manage the assets and allocate benefits to the beneficiaries are set out in the trust deed. The deed is approved by the settlor and, in most cases, is supplemented by a letter of wishes or memorandum of guidance. These ancillary documents are less formal than the trust deed itself but will typically outline the settlor’s family’s philosophy and will offer the trustees guidance on the long-term strategy which the settlor has in mind for the assets settled on trust. A letter of wishes will typically be expressed to say that it does not purport to have legal effect nor to bind the trustees.

There are a number of different approaches that might be taken by the Hong Kong family courts in relation to trusts — it makes no difference whether those trusts are based in Hong Kong or offshore — and these are broadly analogous to those that are available in the English courts, with many of the relevant authorities being English. English decisions are not binding on Hong Kong courts, but treated as highly persuasive authorities.

The basic approaches are to: 

  • treat the trust as a financial resource. The court can make an order against a spouse with trust interests personally, and it is left to the spouse to work out how the liability will be met. This is on the basis that the trust is regarded by the court as a resource of the spouse, which may include a finding that in effect the spouse is likely to have access to the funds in the trust (see the Charman likelihood test below);
  • vary the trust if the trust is an ante-nuptial or post-nuptial settlement, for example, by making a provision for a spouse who is not already a beneficiary or removing a trustee;
  • treat the trust as a “sham” and that in reality it is a nominee relationship between the settlor and trustee; and 
  • set aside the disposition creating the trust. 

The leading trust and resource case in Hong Kong is Kan Lai Kwan (KLK) v. Poon Lok To Otto & Anor[2014] HKFLR 329 (Otto Poon). The case largely confirmed the English Court of Appeal’s approach in the English case of Charman v. Charman (see England and Wales chapter). 

The key conclusions drawn from Otto Poon are:

  • The Court of Final Appeal clearly and unequivocally confirmed that the likelihood test in Charman is law in Hong Kong. In other words, the critical question will be “would the trustees be likely to advance all of the capital of the trust to the husband on his request?”.
  • The trust deeds standard term expressly authorising the trustee “to appoint capital and income to any one member of the class of eligible objects to the exclusion of others” was highly significant. In the event that neither of the parties (including the trustees) in the divorce fail to seek an answer to the likelihood test, the court will determine the answer. This effectively means that trustees will be expected to volunteer an answer to the likelihood test even if the question is not asked by any of the parties, including the husband and wife.
  • The nature of the trust assets and the letter of wishes would also be significant. In particular, any reserved powers retained by a protector or settlor will be looked at very closely by the court. 

A Hong Kong court can only exercise its jurisdiction to vary a trust if that trust is found to be nuptial. If a trust is found to be nuptial the Hong Kong court has broad powers to vary it to the extent required properly and fairly to dispose of a spouse’s financial claims. Variation tends to be a last resort and, typically, is only ordered if financial claims cannot be met with non-trust assets. In the Hong Kong Court of First Instance (High Court) case of H v. W [2014] HKEC 955, the court cited Ben Hashem v. Al Shayif [2009] 1 FLR 115, and by way of overview stated: “the court's discretion to vary a nuptial settlement is unfettered and theoretically unlimited, but a settlement ought not be interfered with more than is necessary to do justice between the parties, and the court ought to be very slow to deprive innocent third parties (including children) of their rights under the settlement.”

Following the leading English House of Lords decision in Brooks v. Brooks [1996] AC 375 a “nuptial settlement” is “one which makes some form of continuing provision for both OR either of the parties to a marriage, with or without provision for their children”. So a very broad, and often widely interpreted, definition. In Brooks the court treated a private pension as a nuptial settlement. 

To determine whether a trust is a nuptial settlement, the first question is: is the trust “a settlement”. If the answer is “yes”, the second question is: is the settlement “nuptial” in character? This is a significantly fact- sensitive area. There is no real consistency in approach. 

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1.1. Financial disclosure

The financial disclosure obligations of a spouse in divorce proceedings filed in Hong Kong relating to their trust interests on a worldwide basis are substantial and far-reaching. The spouse is required to provide full and frank disclosure in a detailed financial statement called a Form E (which must be sworn or affirmed on oath), together with full documentary evidence in support. It has a specific section dealing with trusts requiring details to be provided of any “Trust Interests (include interests under a discretionary trust), stating your estimate of the value of the interest and when it is likely to become realisable. If you say it will never be realisable or has no value, give your reasons”.

That obligation is ongoing and requires the disclosure of all relevant documents whenever they come into the spouse’s possession. A standard questionnaire seeking initial further information and documents regarding trust interests will ask for:

  • a copy of the trust deed and all supplemental documents, for example deeds of appointment and deeds of variation;
  • copies of the trust accounts for the last three available years;
  • documentary evidence in the form of a schedule prepared or authenticated by one of the trustees of all capital advanced and income paid to the spouse from the trust since its creation, together with any loans made;
  • an estimate of the income, and if applicable, capital advances which the spouse can reasonably expect to receive from the trust in the foreseeable future; and
  • a copy of all letters of wishes and other documents stating the settlor’s wishes.

Whether or not trustees are joined into divorce proceedings as a party, the Hong Kong court will still expect trustees to co-operate and assist with the provision of disclosure whether the trust is a Hong Kong trust or an offshore trust. The court is likely to join trustees into the proceedings in most cases where there are substantial assets held in trust. Once trustees are joined the court can make orders directly against them. The court could order trustees to produce any documents which it considers necessary for disposing fairly of the applicant spouse’s financial claims. This could apply to any trust related documentation which is in the possession, custody or power of the trustees. In these types of cases, typically, trustees are required to produce copies of documents and provide information including the items listed above as well as details of previous distributions, details of previous requests for distributions or loans, details of previous loans, and (less often) correspondence with settlors and beneficiaries. If the trust is offshore, but there are trust officers of the trust situated in Hong Kong, then those trust officers could be subpoenaed to produce the documentation and information that has been ordered to be produced.

In some cases beneficiaries apply to the court to intervene in the proceedings. In that situation, as occurred in Tchenguiz Imerman v. Imerman [2013] EWHC 3627 (Fam), the court might well order the beneficiaries to disclose within the Hong Kong proceedings documents and information from any proceedings that are being conducted in the jurisdiction where the trust is situated. 

The court can order any third party residing in Hong Kong to provide information and documents through a subpoena. 

The Hong Kong court could issue a letter of request to the court where the trust is situated seeking information from the trustees.

The court might also make an order made for a Single Joint Expert to be appointed to investigate transfers into and out of trusts and provide a valuation of the trust assets.

If offshore trustees submit to the Hong Kong jurisdiction they would likely be expected to put forward a witness statement from a trust officer and to be tendered for cross-examination.

In a case where divorce proceedings are filed outside Hong Kong and there is a Hong Kong trust, the Hong Kong court would be likely to require the trustees to answer a letter of request sent by the court of the foreign divorce jurisdiction. 

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1.2. Financial orders

What types of orders can the court make at the conclusion of Hong Kong divorce proceedings where there is either a Hong Kong or an offshore trust?

  • if the court is satisfied that a trust is likely to be a financial resource available to the spouse in the future, it could make a lump sum order against that spouse and/or the trustees (if the trustees are a party to the proceedings) pursuant to section 4 of the Matrimonial Proceedings and Property Ordinance (MPPO);
  • an order pursuant to section 6(1)(c) of MPPO varying a trust as a nuptial settlement (see below);
  • an order pursuant to section 17(1)(b) of MPPO to set aside transfers into or out of a trust (see below);
  • an order directing the settlor beneficiary to revoke a revocable trust (a Revocation Order (see below)); and
  • ancillary orders or directions to effect/enforce a variation order and/or a Revocation Order.

An order pursuant to section 6(1)(c) of MPPO varying a trust as a nuptial settlement 

Section 6(1)(c) allows a party to apply for, “An order varying for the benefit of the parties to the marriage and of the children of the family or either or any of them any ante-nuptial or postnuptial settlement... made on the parties to the marriage”. The Hong Kong court can only exercise this jurisdiction if a trust is found to be nuptial. In theory, the court’s discretion to vary trusts is unfettered and can include (but is not limited to) ordering payments or transfers of assets out, adding/removing beneficiaries, adding/removing trustees, and the creation of sub-trusts.

An order pursuant to section 17(1)(b) of MPPO to set aside transfers into or out of a trust

In order to exercise the power to set aside dispositions pursuant to section 17(1)(b), the court has to be satisfied that three requirements are met: 

  1. that a disposition has been made to a third party; 
  2. that the disposition was made with the intention of defeating a claim for financial provision; and 
  3. that if the disposition were set aside, financial provision or different financial provision would be made.

The disposition will not be set aside if the third party provided valuable consideration, acted in good faith and had no notice of any intention to defeat the claim. However, if the disposition was made within the previous three years, there is a rebuttable presumption that the disposition was made with the intention of defeating the claim.

Whilst the “intention to defeat” need not necessarily be a party’s sole or dominant intention, the court is concerned under section 17 with the spouse’s subjective intention: see Kemmis v. Kemmis [1988] 2 FLR 223, which was cited with approval by Anthony Chan J in WYSL v. FHCBA [2018] HKCU 2811. In Kemmis, “what had to be proved was not merely a dishonourable intention but a dishonest and fraudulent one, and the evidence which was required to tip the balance had to be correspondingly more convincing”.

A Revocation Order

An order compelling a spouse who is also settlor and beneficiary can potentially be made to revoke any revocable trusts as a mandatory injunction for example as an aid to the enforcement of a lump sum. In other words, it could order the spouse settlor beneficiary to make a lump sum payment and direct him (either simultaneously, or more likely in default of payment, to revoke any revocable trusts). Should that spouse settlor beneficiary fail to comply with the court’s direction, he would not only be in contempt and liable to imprisonment, but the Court of First Instance in Hong Kong has the power, pursuant to section 25A of the High Court Ordinance (Cap 4), to nominate a person in the settlor beneficiary’s place to execute the necessary (revocation) documents.

This is what occurred in H v. W [2014] HKEC 955: the judge acknowledged in her judgment that the trustees had not submitted to the jurisdiction of the Hong Kong court and had been directed by the Cayman court not to submit. The judge stated, “The settlors and Trustee are required to submit to the exclusive jurisdiction of the courts of the Cayman Islands. In fact, in a judgment of the Cayman Court dated 24/12/2010, the Trustee was directed to refrain from submitting to the jurisdiction of Hong Kong.” 

She held: “the Trust be varied so that H be removed as a beneficiary of the Trust; any interests which H may have in the Trust (whether as beneficiary, settlor or otherwise) shall cease; and save as aforesaid, the Trust shall continue in accordance with the terms of the Deed, and with the 1st Respondent and the 3 Children of the family (namely, the eldest son, N and J) as beneficiaries therein and the 1st Respondent as sole Designated Beneficiary (as defined in the Deed)…The Petitioner do take all necessary steps and sign all necessary documents to facilitate and effect the variation of the Trust as set out in paragraph (1) above, and to divest himself of all interests, rights and powers under the Trust and the Deed (whether as beneficiary, settlor or otherwise), such steps shall include, but not limited to: sending the Trustees a written notice to the effect that the Petitioner relinquishes his status of a Designated Beneficiary pursuant to Clause 5(iii)(c) of the Deed; and giving written notice to the Trustee relinquishing and renouncing any and all his interests, rights and powers under the Trust and the Deed (whether as beneficiary, settlor or otherwise).”

Prohibition Orders

The Hong Kong court also has the power to make prohibition orders against parties in family proceedings who have failed to comply with financial orders by preventing them from leaving Hong Kong until the orders are complied with. 

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1.3. Enforcement

The Hong Kong court will want to do all it can to ensure that its order is enforced. In the event that the beneficiary has failed to comply with an order to pay a lump sum, and the trustee has been joined into the proceedings, the court might well order the trustee to pay the lump sum. This could occur whether the trust is onshore or not. 

In this context, it might conceivably seek to enforce the order by putting pressure on beneficiaries who are parties — particularly in the light of H v. W

The Hong Kong court might also be persuaded (as a last resort) that it should make:

  • a mandatory injunction in support of its order directing trustees to confirm their consent to the order (although the Hong Kong court would not actually need their consent to make a variation order); or
  • a prohibitory injunction preventing trustees from contesting the enforceability of the Hong Kong court’s order in the offshore jurisdiction.

A less draconian approach that a spouse might pursue is to argue that, having been joined to, and participated in the proceedings, beneficiaries are estopped from contesting any variation order in any courts both inside and outside Hong Kong. Such an argument would not necessarily require any form of injunction from the Hong Kong courts. The spouse could contend that the estoppel is an automatic legal consequence of the Hong Kong proceedings.

In the event that trustees fail to comply with orders (for example for disclosure, payment of a lump sum, or for an order varying the terms of the trust), the claimant spouse may have to commence separate enforcement proceedings in the courts of the jurisdictions governing the trusts.

Although it is not a sanction as such, the Hong Kong court can draw adverse inferences if the trustees fail to comply with an order. 

If a trust officer or director of the trust were in the Hong Kong jurisdiction, they could be compelled to comply and could be committed to prison for failing to do so.

If a party fails to provide financial disclosure and/or pay a lump sum, as in England and Wales, Judgment Summons proceedings could be taken out against that party resulting in them being committed to prison.

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2 . Prenuptial and postnuptial agreements (PNAs)

The leading cases on PNAs in Hong Kong are SPH v. SA (Forum and marital agreements) [2014] HKFLR 286 and LCYP v. JEK (Ancillary relief, section 17, prenuptial agreements & trusts) [2019] HKFLR 238; [2019] HKCFI 1588. In SPH v. SA the Court of Final Appeal held that the principles enunciated in the English Supreme Court case of Radmacher v. Granatino [2011] 1 AC 534 should be regarded as the law on marital agreements in Hong Kong.

In LCYP v. JEK the Court of First Instance (the High Court) considered whether the wife should be held to an unvitiated pre-nuptial agreement.

PNAs are not binding contracts under Hong Kong law. They are however enforceable by the court and the court is likely to do so provided that the PNA is unvitiated and its terms are “fair”:

  • An unvitiated PNA is one where there is no concern about the fairness of the circumstances surrounding the creation of the PNA: that there was no fraud, misrepresentation or undue pressure at that time, and that it was entered into “freely”. In LCYP v. JEK, Mr Justice Anthony Chan described the word “unvitiated” as “a convenient label to describe a nuptial agreement which is not tainted by any vitiating factor, for example, lack of full disclosure of assets prior to the agreement”.
  • LCYP v. JEK has clarified the law on what is considered to be “fair” and provided guidance about the standard at which the financially weaker party’s needs are to be assessed in the context of an unvitiated PNA. Anthony Chan J summarised, “in very simple terms where there exists an unvitiated nuptial agreement the application of which may conflict with the court’s decision in its absence. The overriding consideration remains that of fairness. An unvitiated nuptial agreement is one of the circumstances to be considered in arriving at a fair distribution of assets. The court will have to assess its weight. In that assessment, needs and compensation would be important, whilst sharing less so.”
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2.1. Procedural requirements

There are no separate procedural requirements for a PNA to be enforceable on divorce: the court’s jurisdiction cannot be ousted by the PNA and the court makes the final determination as to the extent to which it is enforced and the parties will need (subject to circumstances where the case of Crossley applies - see below) to go through the standard and lengthy ancillary relief procedure of exchange of financial disclosure in Forms E, attendance at a First Appointment and a Financial Dispute Resolution Appoint, and then to a trial if the case does not settle. To reduce the risk that a court will treat the PNA as vitiated and given no weight at all, both parties should have independent, specialist, legal advice, they should provide full financial disclosure to each other and the PNA should not be signed too close to the marriage date. It is good practice (but not a rule) that the PNA should be signed not less than 28 days before the marriage. The case of Crossley v. Crossley [2007] EWCA Civ 1491 provides a “short circuit” to normal ancillary relief procedure in a PNA case where there for example is a short, childless marriage and the parties are independently wealthy. 

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2.2. Spouse’s financial claims

PNAs fully cover a spouse’s full income and capital financial claims on divorce including claims against assets held in trusts. There is no matrimonial property regime in Hong Kong.

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2.3. Children’s financial claims

PNAs in Hong Kong do not usually incorporate arrangements for financial provision for children. 

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3 . The media and divorce/family law proceedings

Unlike in England and Wales, the media are not allowed access to proceedings relating to finances and children in the lower courts in Hong Kong (that is up to and including the Court of First Instance - the High Court) as these proceedings are held in private. The media cannot attend hearings and are not allowed access to court documents. Cameras and recording devices are not allowed into the court room. In the very rare event that there is a contested divorce, the trial of the divorce will be heard in public. 

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3.1. Reporting restrictions

As all family law proceedings relating to finances and children are held in private in the lower courts, including up to the Court of First Instance (the High Court), there is no need to apply for any reporting restrictions orders in those courts. In the Court of Appeal and Court of Final Appeal, in cases involving minor children the judgments will be anonymised. In other family law cases in the Court of Appeal and Court of Final Appeal parties can be identified and this would open the possibility of parties making applications for orders restricting reporting.

EXPERT ANALYSIS

Chapters

Austria

Bernhard Motal
Johannes Gasser

Bermuda

Craig MacIntyre
Jonathan Casey

England and Wales

Marcus Dearle
Rahanna Choudhury

France

Charlotte Butruille-Cardew

Italy

Giovanni Cristofaro
Raul-Angelo Papotti

Jersey

James Sheedy
Simon Thomas

Liechtenstein

Bernhard Motal
Johannes Gasser

New Zealand

Anita Chan KC
Richard Reeve

Scotland

Gillian Crandles
Zaynab Al Nasser

South Africa

Zenobia du Toit

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