AEM v. VFM

CACV 261/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 261 OF 2006

(ON APPEAL FROM FCMC 4070 OF 1990)

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J U D G M E N T

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Hon Cheung JA :

The background

1.  The parties are former husband and wife.  For ease of reference and following the approach in the Court below I will refer to them as husband and wife.  The parties were married in England in August 1970.  Two children were born of the marriage.  The first was a son born in 1975.  The second was a daughter born in February 1979.  The parties moved to Hong Kong in May 1987.  In January 1991 the parties were divorced. 

The 1991 Order

2. Upon their divorce the parties reached a settlement on their financial arrangements and the settlement was made an order of the Court dated 27 August 1991 (‘the 1991 Order’) under which the husband was to pay the wife

(1)	a lump sum of HK$2 million by instalments within two years;
(2)	periodical payments of HK$1,250 per month for the wife’s maintenance;
(3)	periodical payments of HK$16,250 per month for each of the two children until they reach the age of 18 or complete full-time education.

3. The daughter was born with congenital defects and she was mentally and physically handicapped.  The specific agreement concerning the daughter was that she was to receive her maintenance until she was able to support herself and live independently.  The husband further undertook to pay for the school fees of the children and their educational and school expenses in boarding school in UK. 

4. The parties further agreed that their joint property in the United Kingdom known as Bury Farm was to be maintained for use by either of them while they were living outside UK and upon the wife’s decision to return to live in UK she was to have the option of the exclusive use of Bury Farm as her principal place of residence with the children.  In the event the wife returned to the UK but did not take up occupation at Bury Farm as the principal place of residence the husband agreed to provide and pay for an accommodation for her.

5. The periodical payments to the wife and two children were index-linked.  They were to be automatically increased annually by the lower of the Retail Price Index in whichever country the wife resided or the husband’s increase in salary.

The 1994 Order

6. In 1994 the wife decided to return to UK and a Court order dated 6 August 1994 (‘the 1994 Order’) incorporating new agreements reached by the parties was made.  By this new Court order the wife was to be paid a monthly sum of £2,335 for herself, £110 for the son and £180 for the daughter with the same annual increment as before. 

7. Upon returning to England the wife instead of taking up residence in Bury Farm in UK sold her interest in that property to the husband for the sum of £173,577 and purchased a house at Farrer Top, St. Albans, England as her home.  She also purchased a property in Scotland which she ran as a bed and breakfast guesthouse during the tourist season. 

The 1998 Order

8. In April 1997 the wife applied to increase the monthly maintenance for herself and the daughter who was then already 18 but still undergoing schooling.  The son was by then 23 and had finished his education and was not involved in the application. 

9. By an order dated 30 July 1998 (‘the 1998 Order’) H H Judge Bruno Chan varied the periodical payments for the wife and the daughter as follows :

1)	£3,000 per month for the wife,
2)	£300 per month for the daughter,
3)	£2,000 per annum by way of reimbursement of home help services expenses for the daughter commencing 1999.

10. The new rate of payment was to commence on 1 May 1997.    

The 1998 summons

11. The 1998 Order did not provide for index link of the periodical payments as before.  The wife on 15 September 1998 issued a summons asking for the periodical payments contained in the 1998 Order to be index-linked.  A hearing date for this application was initially set down for 11 June 1999.  However the parties by consent vacated this hearing date on 9 June 1999 and the matter was not further pursued by the wife.

The 2006 Order

12. On 22 August 2005 the wife applied to vary the 1998 Order.  On 12 May 2006 (‘the 2006 Order’) Judge Chan varied the maintenance payment as follows :

‘	(a)	The periodical payments under the Order of 30th July 1998 for the Petitioner be increased and backdated as follows, with credit to be given for amounts already paid:­
		1999	£40,880
		2000	£41,780
		2001	£42,700
		2002	£43,720
		2003	£44,680
		2004	£45,663
		2005	£46,668
		2006	£50,000
	(b)	The said periodical payments of £50,000 per annum, payable by equal monthly instalments, shall be increased by 5% annually starting 1stJanuary 2007 until further order.
	(c)	The Respondent shall pay a further sum of £2000 per annum to the Petitioner for the benefit of their daughter (name), which sum shall also be increased by 5% annually.’

13. From this Order the husband appeals. 

Principles on variation

Principle on backdating of order

See Rayden & Jackson on Divorce and Family Matters 18^th Ed, Vol. 1, Para. 18.25 and the cases cited.

Financial position of the wife when the 2006 Order was made

16. The wife was 56 years of age when the 2006 Order was made.  She did not work and had to spend more time looking after the daughter.  The wife had since 2003 sold her property in Scotland and also her bed and breakfast business.  This was due to the drop in the profit of the operation and the poor health of her father who had terminal illness.  Her father died in 2004.  Her mother has been unwell and requires her constantly keeping up her company and spending more time with her.  This would make it difficult for the wife to maintain a regular job.  The wife had also disposed of her property in Farrer Top.

17. The Judge found that the wife has a total capital of slightly over £565,000.  It was the wife’s intention to acquire a larger property to live in.  The Judge found that Ferrer Top was never purchased or intended to be the final home for the wife and children because it was purchased while she was still living in Hong Kong as one of the investments of her lump sum; it was always her intention that she should reside at the much bigger and more expensive Bury Farm should she return to live in the UK. 

18. The wife’s case for variation of the 1998 Order was that there was no index link in the order so that the periodical payments for her and the daughter have not been properly adjusted all these years to meet their rising needs and the increase in the costs of living.  Her income from interest earned from bank accounts amounted to an average of only slightly over £4,000 per year instead of £6,000 as originally anticipated in the 1998 Order.  This was due to less savings after payment of her legal costs as well as UK income tax increase on her earned interest. 

19. The husband had ceased payment to the daughter since 2003.  The daughter now receives government assistance from the UK which covers her general living expenses.  The daughter has moved to semi independent living in 2005 but has had difficulties in adjusting to living in a flat on her own.  This requires the wife to visit her more frequently.  The wife said the government assistance actually received by the daughter was insufficient to cover her other expenses such as clothing, holidays, presents, hygiene and other personal items.  

Financial position of the husband

20. The husband is now 60 years of age.  During the marriage and until recently he was the Chief Financial Officer of a major publicly listed company (‘the company’) in Hong Kong.  According to the judgment on the 1998 Order, for the tax year 1996 to 1997 the husband received a salary of HK$2.02 million, director’s fee of HK$520,000 and a bonus of HK$10 million.  He also received additional benefits of the use of a car, medical coverage, life insurance and air-tickets to London for his family once each year.  In 1997 to 1998 his salary was HK2.08 million, director’s fee of HK$514,000 and a bonus of HK$12 million. 

21. In April 2005 the husband ceased to be the Chief Financial Officer but remains as an executive director with a basic salary of HK$150,000 per month.  He could no longer expect to receive the same level of bonuses as in the past.  The husband has since the parties divorced remarried and has now a daughter aged seven years old.  He is living with his new family in Hong Kong.

22. According to the wife’s estimate the husband’s worth was more than HK$110 million.  This estimate was not challenged by the husband and the Judge found that this estimate was consistent with the evidence before the court.  The husband’s assets include :

(1)	his shares in the company;
(2)	his interest in a property in Hong Kong which he resides with his new family;
(3)	the proceeds of sale of Bury Farm;
(4)	his half share in the proceeds of sale of an overseas property;
(5)	other investments and cash at bank.

23. It is not in dispute that the settlement received by the wife when the parties divorced was about two thirds of the husband’s assets at that time.  It cannot be disputed that the husband’s wealth has increased since.

The Judge applied index-linked increase

24. It is clear from the judgment that the Judge varied the 1998 Order and backdated it to 1999 on the basis that the 1998 Order should be index-linked.  After referring to the index-linked 1991 and 1994 Orders the Judge stated that :

‘	43.	In 1997 when the Wife applied for variation of maintenance, it was clearly stated in her application that it was for increase of the maintenance for herself and (the daughter), as (the son) had then already become financially independent.
	44.	There was nothing in that application, or indeed in any of her supportive affidavits, to indicate that she wanted to vary the index linking as well.  Nor was it, for that matter, in any of the Husband’s affidavits either.  In fact, as evidenced in my judgment of 30th July 1998, it was never an issue at the trial and, although there appeared to be some confusion about a subsequent application issued by the Wife on 15th September 1998 over index linking, which was never formally dealt with as it was subsequently withdrawn, I fail to see how all these could be interpreted that the index linking to the periodical payments for the maintenance of the Wife and (the daughter) had been altered or deleted from the order as a result of my judgment.  Like all the other terms, undertakings and orders in the original settlement which were not the subject matter under the Wife’s application of 1997, the original index linking would have remained unchanged in the order, as it must have been the parties’ intention at that time, as was mine, and hence the periodical payments for the Wife and (the daughter) should have been adjusted accordingly after 1998.’

25. When the Judge was dealing with the 1998 application to vary he found that the husband’s financial position would be able to meet the application by the wife to increase the maintenance without any real difficulty.  In the current application the Judge stated in his judgment that although the husband’s salary had not increased since 1998,

‘

the husband accepted that his total income had in fact recorded an increase for five years over the past seven years and in applying the index link in the original order to these income increases the 1998 award would have been increased by 14.27% over the years bringing the wife’s periodical payment to £40,138 for the year of 2004 and remaining at the same amount in view of the fact that there had been no increase to his income in 2005.’

26. For the years 1999 to 2005, the Judge adopted a 2.2% annual increase from an adjusted 1998 figure which was based on the wife’s expenses less her source of income.  The 2.2% is based on the average of the total Retail Price Index increase of 17.6% (after excluding mortgage repayment from the increase of 18.5%) from 1997 to 2004. 

27. As to the 5% increase adopted by the Judge for 2006 and afterwards he relied on the evidence adduced by the wife that inflation was running about 7% in London while the rest of UK was up to 4.4% after adjusting the Consumer Price Index to take account of various factors and that inflation may continue to rise.  Information provided by the wife showed that while the price of goods had been kept low generally, the costs of services have risen by as much as 29% since 1997.  This includes petrol, car insurance, transport costs, holiday costs and health costs.  The Judge then adopted a figure of 5%.

28. The Judge further held that the local government subsidy for the daughter was not sufficient to cover her expenses and that it would be appropriate for the wife to be given an annual sum of £2,000 to cover the daughter’s expenses.  The annual sum would also be subject to a 5% annual increase but the husband would be entitled to seek a regular account on a quarterly basis on the daughter’s expenses. 

The challenge by the husband

29. The challenge by the husband to the 2006 Order is that,

1.	It was wrong for the Judge to backdate the order to 1999 and
2.	The Judge was wrong to adopt a 5% increase from 2006 onwards.

30. I will deal with them in turn.

Was the backdating wrong?

31. In my view the Judge was correct when he backdated the order to 1999.  There was sufficient evidence before the Judge to show that the increase in price in goods and services eroded the value of the periodical payment received by the wife.  The Judge did not radically increase the periodical payment in the 1998 Order but only increased the periodical payment by a modest 2.2% annually.  There was no challenge by the husband on the figures adopted by the judge on the adjusted 1998 periodical payment.  The adjustment was gradual over the years.  I see nothing wrong for the Judge to adopt this approach in order to ensure that the wife could get what she was properly entitled to from the beginning and that the substantial wealth of the husband which has increased since the divorce allowed the Court to make the upward adjustment.

32. The Judge could make the adjustment either by reference to the index-linked provision in the 1991 Order or without it.  The term ‘salary’ in the index-linked provision must include both the ‘wage’ and ‘bonus’ received by the husband from his employer.  Any other way of interpreting ‘salary’ would be an artificial one.  The husband in fact had accepted this approach by the annual adjustment prior to the 1998 Order.

33. In any event the evidence before the Judge allowed him to make the adjustment even without resorting to the index-linked provision.

34. In S. v. S. [1987] 2 All ER 312 at 319 Purchas L.J. of the English Court of Appeal stated that,

‘

There may well be cases, albeit exceptional ones, where in order to right a wrong order made in the past the backdating of the order over a period of years can be justified ... Normally the countervailing effects of a shortfall in proper financial support in the past and the effect of the increase in the size of the order eventually made as a result in the fall in the value of the pound will be compensated in a rough and ready way over a comparatively short period of retroactive effect by the exercise of his general discretion by the judge in determining both the size of the order and the length of the backdating.’

35. In this case the adjusted annual figure was a modest one and was gradual in nature.  While the backdated period was a long one it does not mean that this is by itself wrong.  The Court was merely doing what is just in the circumstances of the case. 

36. In S. v. S. the backdating was drastically reduced on appeal.  This is due to the peculiar facts of that case.  The Judge varied a periodical payment for the wife from £23,000 to £70,000 and backdated the same £70,000 without any gradual adjustment for seven years.  The variation was made on 1 July 1986 and backdated to 6 April 1979.  The order was set aside on appeal and the order was only backdated to 6 April 1986.

37. It is clear from S. v. S. the Judge adopted this approach because he had also given an option to the husband to make a lump sum payment of £400,000 to the wife which was not accepted by him.  As Purchas L.J. observed at page 320,

‘

In the absence of specific reference in his judgment by the judge to the reasons for this exceptional period of retroaction, and in view of the information imparted to us by counsel for the wife at the outset of his submissions that he had drawn the judge’s attention to the parlous state of the wife’s finances, it seems at least a reasonable inference to draw that the judge was understandably attracted to a solution to this problem amongst other reasons to protect the one remaining minor child of the family.  It is to be remembered that this substantial payment of periodical payments as a retrospective provision would not have been affected if the judge’s ‘invitation’ to the husband to make the substantial payment of £400,000 had been accepted.’

Hence the reason why backdating was disallowed in S. v. S. can be explained by its own facts.

38. On the other hand in Cornick v. Cornick (No. 2) a backdating order was affirmed because of the fact that the husband’s income had risen substantially during that period and the wife had not in fact received what had been expected.

39. In my view the wife has shown that there were indeed exceptional circumstances which justified the backdating.  It is true that she could have applied earlier for the variation particularly when she had previously lodged an application for the 1998 Order to be made index-linked which was then abandoned.  However, the wife explained that it was costly for her to lodge applications in Hong Kong when she is no longer living here.

40. Although Mr. McCoy S.C. who appeared together with Mr. Clough as counsel for the husband, submitted that the total adjusted figures when added together is about HK$1 million, one must bear in mind that the actual annual increase is a very modest figure and the wife cannot be criticized for not making an earlier application.  The costs factor is a relevant one.  What is more important is that the husband will not suffer any hardship if he is required to pay the adjusted sum. 

41. This is also not a case where the wife seeks a lump sum payment by a backdoor manner.  The argument that section 12 of MPPO only allows enforcement of arrears due for more than one year is not relevant to the issue.  Section 12 merely says that arrears of more than 12 months may not be enforced without leave of the Court.  It is not an absolute prohibition.

42. The Judge was dealing with a discretionary jurisdiction and in my view there is no room by me to interfere with the exercise of discretion by the Judge.  In any event even if I were to exercise the discretion afresh, I would have come to the same result.

Was the 5% increase wrong?

43. It is clear that the husband vehemently opposed any index-linked periodical payment in the Court below.  Mr. McCoy, who did not appear below, took a different course on appeal and in challenging the 5% increase, he relied on the index-linked provision in the 1991 Order.  He relied on the principle established in Edgar v. Edgar [1980] 1 WLR 1410.

The Edgar principle

44. The well established principle in Edgar is that in considering the application for financial provision the Court is required to have regard to all the circumstances of the parties and the existence of a prior agreement was an important aspect which should be looked at having regard to the conduct of the two parties, both leading up to the agreement and subsequent thereto, and the Court should bear in mind that formal agreements, properly and fairly arrived at with competent legal advice, should be given effect to unless good and substantial grounds were shown for concluding that injustice would be done by holding the parties to the terms of the agreement.

45. This approach was recently affirmed by this Court (Stock, Yuen JJA and Hartmann J) in L v. C [2007] 3 HKLRD 819.

46. Mr. McCoy’s argument is that the index-linked provision will not by its terms permit any further upward adjustment because the husband’s salary no longer increases after 2005.

Ambit of the index-linked provision

47. I have no problem with the Edgar principle at all but I do have reservation about the ambit of the index-linked provision.  In my view the provision provides a pre-determined formula for annual adjustment.  For example, if the rate of salary increase is lower than that of the Retail Price Index increase, then the adjustment will be based on the rate of the salary increase even though the rate of increase of the Retail Price Index is higher.   While the wording used in this pre-determined formula may have the effect of precluding in any given year an upward adjustment when the salary of the husband does not increase in accordance with this formula, one has to look at the 1991 Order as a whole to see if the wife’s right to vary when circumstances justify it is somehow also precluded.  One of the provisions of the 1991 Order is contained in Acknowledgement A(10) that :

‘

(10)

That these financial arrangements are contingent upon the Respondent (husband) continuing to enjoy an income substantially similar to that he receives at present and if it declines such provisions relating to continuing payments will have to be adjusted, both parties acting in good faith.’

48. This provision clearly envisages variation to be made due to change in circumstances.  I am unable to say that the index-linked provision shows that the clear intention of the parties is that the wife is precluded from seeking an increase in her periodical payment simply when the husband’s salary does not increase.  The change of circumstances by reason of the fact that the value of the payment is eroded by increase in the cost of living and that the husband’s wealth is able to meet the adjustment will permit a variation to be made.  The Court is not departing radically from the agreement of the parties by allowing a variation when the circumstances justify it.  Hence the Judge was correct to allow an upward adjustment from 2005 onwards.

The new evidence

49. Mr. McCoy also challenged the 5% figure adopted by the Judge.  According to the new evidence produced by the husband in this appeal which was not challenged by the wife, the annualized inflation rate of UK from 1986 to 2006 is 3.59%.  This is about 1.5% lower than the 5% adopted by the Judge.  This cannot be regarded as an insignificant difference.  I have considered whether, given the 2.2% adopted by the Judge for the backdating was lower than 3.59%, I should allow the 5% figure to stand in order to compensate the wife for the lower rate of adjustment between 1999 and 2005.  However, I conclude that since the backdating is already for a lengthy period, a fairer way of dealing with the matter is to reduce the 5% figure to 3.59% to make it accord with available statistics.

Conclusion

50. The appeal is only allowed to the extent that the figure of 5% is reduced to 3.59%.

Costs

51. The husband only succeeded in a very small part of his appeal and by reference to new evidence not available before the Judge.  The provisional costs order I will make is that the wife is to have 90% of the costs of the appeal.  The costs below remain the same.

Hon A. Cheung J :

52. I agree.