Introduction

Under section 4(1) of the Matrimonial Proceedings and Property Ordinance (Chapter 192 of the Laws of Hong Kong) (the “Ordinance”), the court may, on grating a decree of divorce or at any time thereafter, make a number of orders including an order that either party to the marriage shall make to the other such periodical payments and for such term as may be ordered by the court. In deciding whether to make such order, the court is imposed with the duty under section 7 of the Ordinance to take into account, among other things, the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future (the “Financial Resources”).

Among the disputes that often arise as to what kind of assets would form part of the Financial Resources of the parties to the marriage, the court is often tasked with determining whether assets subject to discretionary trust (and often family trust) shall be regarded as part of the Financial Resources. The general principles governing such issue are laid down in the judgement by the Court of Final Appeal in Kan Lai Kwan v Poon Lok To Otto [2014] HKCFA 66 (the “Kan Case”).

Background

The husband and his wife in the Kan Case married in 1968. In 1977, the husband started an engineering business which later became successful. In 1995, a holding company (the “Company”) was incorporated to hold all the operating companies of the husband’s business (the “Group”). The shares of the Company were settled on a discretionary family trust based in Jersey with a professional trustee. In particular, the trust assets consisted solely of 84.63% of the issued shares in the Company and a matrimonial home (the “Trust Assets”). The husband was appointed as a protector with the power to remove the trustee and the beneficiaries of the family trust were the husband, his wife and their three children.

In February 2009, the husband presented a divorce petition based on two years’ separation. His wife did not defend the proceedings. At issue was whether, and if so the extent to which, the Trust Assets form part of the Financial Resources of the husband under section 7(1)(a) of the Ordinance.

The law

In determining whether the Trust Assets fall within the scope of the Financial Resources of the husband, the court asked whether the trustee, acting in accordance with its duties and having regard to all relevant considerations, would on balance of probabilities, advance the whole or part of the capital or income of the trust to the husband if so requested.

The aforementioned likelihood of asset advancement shall be adjudged by taking into account the whole circumstances of the case and factors such as the terms of the trust, the power of the settlor, the nature of the Trust Assets and the past conducts between the trustee and settlor would likely shed lights on the probability issue. In particular, the court in the Kan Case considered the following factors in reaching its decision:

1.        whether the trustee lacks any managerial role over the trust assets;

2.        whether the trustee may only exercise certain important powers with the settlor’s consent;

3.        whether the settlor is eligible to gain from the trustee’s capital and income distribution by naming himself as one of the beneficiary;

4.        whether the settlor has the ultimate power of replacing the trustee in its capacity as the protector or otherwise;

5.        whether the trust’s ability to generate income in turn depends on the act of the settlor;

6.        whether the settlor had drawn on the trust for personal purposes; and

7.        whether the trustee had a history of complying with the settlor’s letters of wishes.

It is important to note that in establishing the aforementioned likelihood of asset advancement, it is unnecessary for the party to prove breach of trust on part of the trustee. In other words, the Trust Assets could well fall within the definition of the Financial Resources even when the trustee was acting in good faith and in accordance with its duties under the trust. In the situation where the trustee intentionally (and in bad faith) breached the trust by advancing the trust assets to the settlor or where the settlor, based on the terms of the trust and its power under the trust, did not effectively divest himself of the trust property, the trust asset in question may fall within the reach of the claim from the other party to the marriage.

Decision

In brief, the CFA considered the following material facts in reaching its decision that the trustee would, on balance of probabilities, advance the whole or part of the Trust Assets to the husband if so requested and the Trust Assets shall therefore be regarded as the Financial Resources of the husband:

1.        the terms of the trust and the letters of wishes indicated that the husband held a dominant position in relation to the administration of the trust;

2.        the husband, in his capacity as the protector of the trust, reserved to himself important powers such as the power to remove and appoint trustee and the power to remove potential beneficiaries;

3.        it is also obvious from the terms of the trust that the husband intended the trustee to have only the passive role of a shareholder of the Company and the actual power of managing the Group falls back to the husband;

4.        the past dealing between the husband and the trustee reveals that the trustee often acceded to the husband’s wishes and allowed him access to funds;

5.        when the Company declared a dividend, the trustee had invariably compiled with the husband’s wishes to distribute the money to the husband; and

6.        the husband had been able to draw funds from the trust to satisfy awards in his wife’s favour.

Conclusion

The principles laid down in the Kan Case serve the purpose of preventing parties to the marriage from extracting their assets from the pool of Financial Resources which may be subject to the court’s order under the Ordinance. While it has become more popular for the families in Hong Kong to set up family trust for the purpose of managing their family assets, it is believed that disputes of this kind may become more common in the future.