Introduction

Crypto investments are becoming more prevalent in recent years. When it comes to the division of matrimonial assets in divorce proceedings, how is the value of crypto investments assessed and dealt with? In the recent case BC v MSH also known as H, MSO and Others [2023] HKFC 222, the Family Court, inter alia, provided a list of information that a party is required to provide in relation to crypto investments for ancillary relief proceedings.

Background

This case concerns the final ancillary relief matters between a divorced couple. The husband’s assets consisted of crypto investments. The husband claimed that the initial value of the crypto investments was HK$2,121,750, but has since significantly devalued to HK$1,119,158.52.

The wife claimed that the crypto investments do not conform with the husband’s historical pattern of investments and hence are “wanton” or reckless investments, such that the initial value of HK$2,121,750 should be added back to the pot of matrimonial assets to be divided, instead of the current value of HK$1,119,158.52.

Issues

Among other things for the final determination of ancillary relief, the Court considered two issues in relation to Crypto investments highlighted as follows:

1.       Whether the husband has fulfilled his duty of disclosure in relation to his crypto investments; and

 

2.       Whether the crypto investments are “wanton” spending such that the initial value should be added back to the pot of matrimonial assets.

Decision

Issue 1: Whether the husband has fulfilled his duty of disclosure in relation to his crypto investments?

In considering this issue, the Court sets out the following legal principles in relation to the parties’ duty of full and frank disclosure in ancillary relief proceedings:

1.       The parties have the duty to give full and frank disclosure of all the relevant information and documents to both the other side and the court. This duty is not just owed to the other party, but more importantly is owed to the court. This duty of disclosure applies invariably to contested proceedings, as well as to exchanges of information between the parties (and their solicitors) leading to consent orders on settlement of the ancillary relief matters.

 

2.       The duty of full and frank disclosure is a continuous one. The material and documents that are disclosed must be correct, complete and up to date.

 

3.       The duty of full and frank disclosure is a positive one, and should be fulfilled bona fide, meaning that the material disclosed should on its own meaningfully assist in informing others as to the means of that party. The parties should not adopt a wait and see approach with a hope that the opponent might fail to ask the right question.

 

4.       In relation to how the disclosure should be made, according to Katherine Ching Yip v Horst Joachim  Franz Geicke (HCA 676/2016, unrep.,  9 Nov 2016), the disclosure must be “full, frank and clear”, and “to give a presentation that is immediately understandable by a solicitor of average financial sophistication”.

 

5.       When one’s assets or asset structure are complex, that party is required to, from the outset, provide even fuller and franker exposure and explanation of his assets.

 

Applying the above principles, the court decided that the husband did not fulfill his duty of full and frank disclosure in relation to his crypto investment.

Unlike paper money, crypto currency does not exist in physical form and is not issued or backed by a central authority (such as a national bank), which contributes to its novelty and complexity. Due to its complexity, the husband should have provided even fuller and franker exposure and explanation of his crypto investment.

Further, the documents provided by the husband in relation to his crypto investment does not on its own meaningfully assist in informing others, and is not immediately understandable by a solicitor of average financial sophistication. The transaction reports provided by him do not show the current holding and value of the crypto investments, his name, account number, user ID of his crypto accounts or email address which can readily identify that the crypto account belongs to him.

The court also set out a non-exhaustive list of information to be provided in a party’s Form E (i.e. the party’s financial statement) in relation to crypto investment. The view is that disclosure of crypto currency should be of no difference to traditional paper money that is kept in bank accounts. Disclosure of crypto currency should:

1.       state clearly the account number or user ID or any other identification information that would readily relate him to the relevant crypto account and crypto wallet;

 

2.       provide comprehensible transaction report for the period required by Form E, namely 12 months prior to his/her Form E. The said transaction report shall bear the information stated in (1) above;

 

3.       provide a colour photograph of the crypto wallet depicting the balance or current value of each crypto account. The said photograph should be duly dated. A screen shot without a date or any identification information is not sufficient and helpful; and

 

4.       (as there is no central authority to determine/manage the value of crypto currencies) explain briefly the basis of valuation of each crypto account.

 

Issue 2: Whether the crypto investments are “wanton” spending such that the initial value should be added back to the pot of matrimonial assets?

The relevant legal principle is that an expenditure may be “added back” by the court to the matrimonial pool of assets before division if the court is satisfied that such expenditure was “wanton”, “reckless” or “extravagant”. Such add back should be conducted cautiously by reference only to clear evidence of dissipation.

The wife alleged that it was never the husband’s investment pattern to invest in anything which is of high risk, as he gained insight from his father’s past experience in stock which resulted in substantial losses.

However, upon examining the affirmation evidence, the court concluded that the husband had a keen interest in investing in new areas of business that were not traditional. The court did not find it surprising that the husband would be interested in the new area of crypto products.

In addition, the court found that the loss in value of the crypto investment was due to the volatility of the real market. A distinction should be drawn between making a bona fide bad investment decision with wanton and reckless dissipation of the assets.

Hence, the court found that the husband was not “reckless” in his crypto investments. Accordingly, the court added back the current value of the crypto currencies, instead of the original value, to the matrimonial pool of assets.

Key takeaway

In ancillary relief proceedings, if a party possesses crypto investments or currencies, he or she shall be mindful of the extent of information to provide to comply with his/her positive duty of frank and full disclosure. Further, from this case we can see that cypto investments are not necessarily considered as wanton dissipation of assets in the context of ancillary relief proceedings.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2024