Introduction

In the recent case of LCTD v CKMC [2024] HKFC 156, the Hong Kong Family Court addressed the issue of beneficial ownership of shares in two family companies, CEC and CL, in the context of matrimonial proceedings. The judgment, handed down by Deputy Judge Robin Egerton on 28 August 2024, provides important guidance on the burden of proof required to establish beneficial ownership in trust arrangements, particularly where such arrangements are alleged to exist within a family context. This case highlights the challenges of proving informal family trusts and the importance of contemporaneous evidence in such disputes.

Background

The proceedings arose from the Wife’s petition for divorce filed in May 2018. The dispute centered on the beneficial ownership of shares in two companies, CEC and CL, which were established by the Wife’s father. The Wife’s four siblings (the “Interveners”) claimed that the Wife held 28% of the shares in CEC and 16% of the shares in CL on trust for them. The Husband, however, contended that the shares were held by the Wife in her own right, either as a reward for their joint efforts in managing the companies or as a gift to the Wife.

The key issue for determination was whether the Wife held the shares in CEC and CL on trust for her siblings, and if so, whether the Interveners were entitled to a declaration of their beneficial ownership in those shares.

Key findings

Burden of proof and evidence

The Court emphasized that the burden of proving the existence of a trust lies with the party asserting it. In this case, the Interveners had to demonstrate that the Wife held the shares on trust for them. However, the Court found that the Interveners’ evidence was insufficient to establish the existence of such a trust. Notably, the Father, who was alleged to have created the trust, did not file any evidence to corroborate the Interveners’ claims. This absence of evidence from the settlor was a significant hurdle for the Interveners. 

Inconsistencies in evidence

For the shares of CL, the Court identified several inconsistencies in the evidence presented by the Interveners and the Wife. For example, the Wife’s oral testimony regarding the creation of the trust over the CL shares was inconsistent with her written evidence. She initially stated in writing that the trust was created in 2014 but later orally claimed it was established in 1994, the year CL was incorporated. This inconsistency undermined her credibility and weakened the Interveners’ case. In the circumstances, in light of the Interveners’ paucity of evidence as to the establishment of a trust in relation to the CL shares, the inconsistent evidence of the Wife and the potential application of the rule against perpetuities (as on Wife’s case the trust was set up in 1994), the Court decided that the Interveners have not sufficiently carried the burden of proof to establish their beneficial ownership in the CL shares.

Informal family arrangements vs formal trusts

For the shares of CEC, The Court found that the financial arrangements described by the Interveners and the Wife were more likely to be an informal family arrangement rather than a formal trust. The Wife made monthly payments to her siblings and mother, but these payments were erratic and not clearly linked to any purported beneficial shareholdings. The lack of formal accounting or documentation further supported the Court’s conclusion that no formal trust had been created.

Husband’s positive case

The Husband argued that the Wife’s shareholding in CEC was a reward for their joint efforts in resolving crises within the company. However, the Court did not accept this, noting that the Husband had not provided sufficient evidence to support his claim. The Court also observed the Husband’s failure to mention the Wife’s shareholding in his Form E which undermined his case. However, the Court clarified that in the context of the forthcoming Ancillary Relief Proceedings, this is not a determination of any “contribution” the Husband may or may not have made.

Decision

The Court dismissed the Interveners’ claims, holding that they had failed to prove on a balance of probabilities that the Wife held the shares in CEC and CL on trust for them. The judgment underscores the importance of clear and consistent evidence is required to establish beneficial ownership, particularly in cases involving informal family arrangements. The Court also highlighted the difficulties of relying on self-serving testimonies in the absence of corroborating evidence from disinterested third parties.

Takeaway

In Court proceedings, inconsistent testimony can significantly weaken a party’s case. Parties should ensure that their written and oral evidence align to avoid undermining their credibility. Further, informal family arrangements, even if long-standing, may not be sufficient to establish a formal trust. Clear documentation and formal accounting practices are very important to support claims of beneficial ownership.