Introduction

In divorce proceedings, before making any ancillary order for division of matrimonial assets, the Family Court has to first ascertain the matrimonial assets. However, in some situations, the matrimonial assets may be held under the name of third parties such as the husband’s or wife’s relatives. In such case, the ancillary order may affect the title of properties under the name of those third parties.

In such cases, how should parties approach such assets that are held by third parties?  What are the procedures involved? A recent case PMCL v AKK [2023] HKFC 34 provides practical guidance in this area.

Background of the case

This is a case with a long procedural history. The wife (“W”) presented the divorce petition in 2015 to end her marital relationship with the husband (“H”) of about 24 years. Both parties have exchanged their affirmations in support of their respective claims for ancillary relief in about April 2021.

In H’s claim for ancillary relief, he alleged that 13 landed properties (collectively, “Disputed Properties”) held under the name of W’s relatives were in fact matrimonial assets because the funds for the acquisition of the Disputed Properties were sourced from 3 companies owned by H and W (collectively, “Companies”) and/or from the joint bank accounts of H and W (“Joint Bank Accounts”). It is H’s case that the Disputed Properties and the monetary returns derived therefrom are beneficially owned by H and W.

Joinder Summons taken out by H

By a summons dated 8 October 2021 (“Joinder Summons”), H applied for joinder of 6 intended respondents for the determination of beneficial ownership of the Disputed Properties or their sales proceeds. The 6 intended respondents are W’s parents and siblings and also legal owners of part of the Disputed Properties. Three of them had passed away when the Joinder Summons was issued.

Legal principles relevant to the Joinder Summons

The relevant rule on joinder of parties is Order 15 rule 6 of the Rules of High Court (Cap. 4A), which applies to matrimonial proceedings. The objects of Order 15 rule 6 are to ensure that:

1.       all issues in the dispute be effectively adjudicated upon by the Court;

2.       all relevant parties are before the Court;

3.       there is a need for preventing the same related or connected issues being tried again with possibly different results; and

4.       multiplicity of actions is prevented.

 

On joinder of a new party, the relevant approach to be adopted by the Court is to determine whether (i) there is a bona fide claim and a proper question to be tried as between the plaintiff and the intended defendant and (ii) that is necessary or just and convenient for resolution between them as well as between the plaintiff and the defendant in the proceedings.

If there is a bona fide claim, the Court will not engage itself in a scrutiny of the claim or an adjudication of disputed facts. As long as the third party is a necessary party, that party ought to be joined irrespective of the strength of the case.

However, even if an applicant meets the minimum requirement to show there is a legitimate interest in the outcome of the proceedings, the Court still retain discretion to decide whether an order should be made, having regard to:

1.       the prejudice to the parties;

2.       the stage the action has reached when the order was sought;

3.       the delay in making the application; and

4.       any delay that may be caused should the joinder order be made.

 

In the context of matrimonial proceedings, the Court referred to TL v ML [2006] 1 FLR 1263, where it was held that:

“where a dispute arises about the ownership of property in ancillary relief proceedings between a spouse and a third party, that the following things should ordinarily happen: (i) the third party should be joined to the proceedings at the earliest opportunity…”

The Court went on to refer to the Court of Appeal’s judgment in LLC v LMWA [2019] HKCA 347 which acknowledged this approach and set out the following guidance:

“In this respect, there is a difference between cases where the third party is the legal owner or one of the legal owners of the disputed property and cases where a spouse claims that the third party has a beneficial interest in a property legally held under the name of that spouse. In the former case, the third party should be joined as a party since the legal title of the disputed property would have to be transferred or subject to encumbrance if the ownership issue is resolved by the making of a proprietary order…” (emphasis added)

Does H have a bona fide claim?

Applying the above legal principles, the 1^st question to consider was whether H has a bona fide claim on the Disputed Properties. There are mainly 2 categories of Disputed Properties in the present case. The first is in relation to properties allegedly bought with the Companies’ funds and the second is in relation to properties of which funds of the Joint Bank Accounts were allegedly involved.

Properties allegedly bought with the Companies’ funds

The Court held that H did not have a bona fide claim in this category because of the general rule that a shareholder does not have a legal or equitable interest in the property of the company because of the distinct legal personality of a company. This general rule applies equally in matrimonial proceedings.

In this case, H and W are shareholders of SEL and former shareholders of SSEL/NPEL. The funds of these companies are the assets of those companies, not the assets of H and W. Even if the Disputed Properties were in fact bought with the companies’ funds, it did not make the Disputed Properties matrimonial assets owned by H and W.

Properties of which funds of the Joint Bank Accounts were allegedly involved

For this category, the Court is of the view that even if the Disputed Facts are taken in favour of H at this stage, discretion should not be exercised in favour of a joinder because:

1.       Two of the 4 Disputed Properties in this category were sold to third parties, so no proprietary order could be sought against these Disputed Properties;

2.       there was substantial delay in taking out the Joinder Summons and will cause prejudice to W and the intended respondents, in particular as some of the intended respondents had already passed away and could not give evidence on the issue of beneficial ownership;

3.       there was a long procedural history and the parties have already exchanged affirmations on ancillary relief matters; and

4.       disproportionality.

Just and convenient

The 2^nd question for the Court to consider is whether it is just and convenient to join the intended respondents to the proceedings. By way of background, the Companies had commenced High Court action in 2020 against W and the intended respondents for fraud, breach of director’s duties and proprietary restitution.

H contended here that it is just and convenient to join the intended respondents so that all relevant issues and evidence can be fully fleshed out, and H can seek discovery from the intended respondents. H also submitted that there is a substantial overlap of issues in these proceedings and the High Court action. If the joinder is allowed, he may consider revisiting application for a transfer of these proceedings to the High Court to avoid multiplicity of proceedings.

The Court rejected H’s contention based on the following reasons:

1.       The Companies are not parties to this action.

2.       The legal questions to be determined in this dispute on ancillary relief are different from questions to be determined in the High Court action.

3.       There was substantial delay on the part of H to take out the Joinder Summons.

4.       H is the director of the Companies and he should have access and control of the records and documents of the Companies and the Joint Bank Accounts.

 

On the basis of all the above reasons, the Court dismissed the Joinder Summons.

Conclusion

From PMCL v AKK, we have more insight into the Court’s requirements to successfully join third parties into matrimonial proceedings if there are issues of beneficial interest in properties held by third parties.

A potential applicant for joinder should make sure that he/she has a bona fide claim with proper a legal basis of why he/she and/or the wife/husband has beneficial interests on the properties in dispute. In addition, the potential applicant for a joinder should make such application as soon as practicable to avoid the joinder application being dismissed by the Court’s discretion on the ground of delay.

Where there are matrimonial assets held by third parties and a joinder application may be required, the legal procedures and considerations to take into account can be complicated and multi-faceted. Professional advice should be sought to better understand your rights and the procedures required.

For enquiries, please feel free to contact us at:

E: family@onc.hk                                                                T: (852) 2810 1212 W: www.onc.hk                                                                    F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

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 © 2023