SLA nee S v. HKL

FCMC 7500/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MATRIMONIAL CAUSES NO 7500 OF 2010

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R U L I N G

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Introduction

1. This is the wife petitioner’s application under section 17 of the Matrimonial Proceedings and Property Ordinance to set aside the disposition by the respondent husband of his 100 per cent shareholding in L&H.  This shareholding was held as to 9,000 shares by himself and the remaining 1,000 shares through his wholly-owned company CS.  I will refer to the parties as the husband the wife.

2. Before I come to the merits of the application I wish to say something about the procedure that I have adopted in hearing the application.

3. This is a hearing of the wife’s application for ancillary relief following the parties’ divorce.  The wife is from Sweden and the husband from Finland although they had lived in Hong Kong for many years.  The wife has now returned to Sweden where she resides in the family home together with their son S, who is now 20 and engaged in tertiary education and will be for the next 4 years or so. 

4. The husband appears to be largely based in Taiwan although his work requires him to travel frequently, mostly in Mainland China.  He also travels to Hong Kong.  The husband, who for most of this litigation has been represented by solicitors but is now representing himself, sent an e-mail to the court on the afternoon before the hearing started on Wednesday this week to say that on medical grounds he would not be attending.  It is unnecessary for me to go into this aspect at this time, but suffice it to say that I decided to proceed with the hearing in the husband’s absence. 

5. As a matter of case management I have decided to compartmentalise the hearing by first taking the wife’s evidence on this application, which I have, and upon which I am now ruling.  This is the best way to proceed; in fact, the only way to proceed because if I set aside the disposition of these shares the effect will be that the husband will be held to be the owner of L&H, a profitable company, which acts as agent for European manufacturers of handling equipment and heavy machinery for the steel industry.  The value of the company will then come into the asset pool which will fall to be distributed between the parties in the ancillary relief application. 

6. There is in existence a draft valuation of L&H prepared by BDO, the single joint expert, but BDO’s valuation cannot be completed until the 2010 accounts are made available to it.  There is an extant subpoena addressed to Mr P, L&H’s accountant/company secretary to release those accounts to BDO. 

7. If I set aside the disposition, which the wife says is a sham transaction, then I will need the valuation of L&H.  If I do not set it aside, then I would have thought that this may not be necessary, but at all events, it will be helpful to know at this relatively early stage in the trial whether this disposal of the husband’s shares in L&H is to be set aside.  In that way, come his final submission Mr Hughes, the wife’s learned counsel, will know the precise extent of the asset pool and can therefore make more effective submissions as to how the ancillary relief application should be disposed of.

8. So much for the procedure that I have adopted thus far. I will now turn to the facts which give rise to the section 17 application.

The Factual Background

9. L&H was, and it remains to be seen whether it is to be treated as still being the alter-ego of the husband through which he conducts his occupation as agent of various well-established machinery producers for the steel industry.  Through his representation these companies sell their products in this part of the world, mostly in Mainland China and Taiwan.  The husband is highly experienced in this industry having operated in this field for well over 25 years.

10. The wife, having been first co-habitee and subsequently wife of the husband for over 30 years, is very familiar with the husband’s business and his associates in it.  She herself is a trained economist and has worked for the F.  Given her knowledge of business in general and her close knowledge of the husband’s business in particular, her evidence in this application must carry considerable weight.

11. Some chronology is important.  In 2001, the husband and an associate of his, Mr ML, left their previous employment with a company called EAB and established L&H as equal partners, holding 5,000 shares each.  In August 2005, Mr ML sold 4,000 of his shares to the husband for HK$4 million, and on 19 October 2009 he sold his remaining 1,000 shares to CS, the husband’s wholly-owned company.  This was for HK$1,000. 

12. On 15 November 2008, five months after the parties had separated, the husband entered into a two paragraph agreement with a Mr C, an associate of his in this field, by which Mr C purportedly acquired 9,000 L&H shares for €1 per share with an option to acquire the remaining 1,000 shares at the end of 2009, also for €1 per share (see bundle P2/388).  These shares had not been valued and the transaction is said to have been in cash.  On the same date the husband is said to have entered into a contract of employment with L&H for 2 years.  Mr C signed on behalf of L&H although he was not a director of the company so it is not clear in what capacity he was signing and whether he had authority to sign.

13. On 15 November 2008 and on 20 November 2009 declarations of trust were signed by the husband and by CS, this done on its behalf by the husband, to hold the legal title of the shares in trust for Mr C.  None of this was disclosed by the husband in his first Form E but was subsequently revealed in correspondence by his then solicitors on 10 September 2010 (see bundle CC/11).  The agreements and the declarations of trust were drafted by the husband himself, so very much homemade documents and not, as was usually the case for company documents, by Mr P, L&H’s accountant/company secretary (see bundle P4/711).  The husband remained a director of L&H until 15 November 2011. 

14. The legal interest in the shares was transferred to Mr C by the husband in CS on 12 March 2010.  Then on 12 May 2012, Mr C disposed of all his shares to a Mr L. Mr L is the Taiwan representative of SB, a company that the husband has been involved with for many years, as is Mr C.  SB has been one of L&H’s main clients. 

15. In considering this matter it is very important to have regard to L&H’s performance up to the purported disposition of his shares by the husband at what was really a considerable undervalue.  Mr Hughes has prepared a Revenue account for L&H from 2001 to 2009, which I gratefully reproduce here.

	Turnover	Other Revenue	Total
2009	197,610	4,059,106	4,256,716
2008	2,586,007	1,859,711	4,445,718
2007	3,514,776	247,419	3,762,185
2006	1,576,240	610,148	2,189,288
2005	2,908,978		2,908,978
2004	2,092,516		2,092,516
2003	1,326,496	40,339	1,366,835
16.05.2001- 31.12.2002	2,356,570	20,558	2,386,128

16. What is to be observed is that there has been a steady increase in revenues since Mr ML and the husband established L&H in 2001.  In its draft valuation of L&H, BDO values it at $484,000 as at November 2008 .  At HK$10 to the Euro that comes to €48,400, and as at 12  November 2010 at HK$3,239,000 or €323,900.  Mr Hughes submits that when Mr P produces the accounts for the year ending 31 December 2010 this last figure will be considerably higher, or so he predicts. 

17. What is significant is that the L&H website and that of its client P, for whom it acts as agent, shows that in June 2008, at about the time the parties separated, L&H was acting for P in regard to the supply by P of a handling system which was to be sold to CSC in Taiwan for € 7,820,000 (see bundle P7/1569-1570).

18. In this regard the wife’s evidence is impressive.  The starting point is a document which she found in the changing room of the husband’s mother’s sauna in Sweden which set out all the workings out by P of the costings on this contract.  When one considers all the add-ons for the sale the price paid by CSC would come to about €13 million.  L&H’s agency fee would at 5 per cent of the selling price come to €650,000 or HK$6.5 million.

19. Whatever the actual figures may be, what I am satisfied about is that this contract has actually gone through and that on any view its effect will be that L&H’s revenues will have gone up and inevitably its share value will also have increased.

20. There is no doubting the closeness of the husband to Mr C and Mr L.  This substantial transaction now reported in P’s website was very much on the stocks in 2008. At this time the parties’ relationship was well and truly at its terminal stage.  The husband is very well-connected with all the significant players, not only Messrs C and L but also Mr LE, now the chief executive officer of P, and also Mr M, the chief executive officer of SB, who are represented in Taiwan and China by Mr C and Mr L.  

21. Notwithstanding the husband’s purported sale of his shares in L&H just when things were beginning to “hot up” commercially for L&H and at such a low price in exchange for modest short-term and badly paid employment with it and with no share of profits, the husband’s very close connection with it continued in a way more consistent with someone who was in control of the company rather than a modestly remunerated employee.  His extensive travel in China, staying in expensive hotels, his private credit card bills being sent to L&H’s offices and his use of its e‑mail address until March 2012 even though he claimed to have stopped working there in November 2010, all serve to undermine his version of events. 

22. When I say “his version of events”, it is right that I should observe that because he has chosen not to appear at this hearing I am not able to have regard to any of his explanations contained in his affidavit or Forms E.  This application under section 17 and the ancillary relief application itself is evidentially unopposed by him which will be of crucial significance, as is the fact that Mr C and Mr L, who have also been served with all the evidence and summonses in support of this section 17 application, they have chosen not to oppose it. They simply have not responded to any of the wife’s solicitors’ letters.

23. If I were to treat these purported share transfers as a sham, then what I would do is to proceed on the basis that the husband remains the true owner of the L&H shares, have those shares valued as they now are at the time of the hearing of the ancillary relief application or at least the most up-to-date valuation available based on the December 2010 accounts and find that these shares at this valuation form part of the husband’s assets and therefore liable to be taken into account in my assessment of what is the asset pool available for distribution, and this all in accordance with section 7 of the Matrimonial Proceedings and Property Ordinance and the principles set out by the Court of Final Appeal in LKW v DD [2008] 2 HKLRD 523.

Section 17 MPPO

24. By section 17(3), where an application is made with respect to a disposition which has taken place less than 3 years before the date of the application, as in this case, and the court is satisfied that the disposition has had the consequence of defeating the applicant’s claim for financial provision, then it shall be presumed unless the contrary is shown that the disposition was made with that intention.

25. In these circumstances the wife has the benefit of that presumption which, by not appearing, the husband has not been able to show otherwise, but even without the benefit of the statutory presumption, given the timing of these events, I am abundantly satisfied that the wife has demonstrated that the husband decided to create documentation which gave the impression that he had sold his shares in L&H, this just as the P transaction was beginning to become a reality, which in the event on my finding came to pass. He knew that the sale by P through the agency of L&H was going to be a profitable one and he was determined that in the divorce the wife was not going to profit from it or at least share in that profit. 

26. It is not necessary for me to reverse or set aside any documentation which purportedly effected the sale of these shares nor in the share register.  What I will say is that on my finding, which I am completely satisfied on the evidence, the husband is the beneficial owner of L&H’s shares, he always has been, and that the current value of these shares will be taken into account as part of the husband’s assets and will form part of the asset pool which will fall to be distributed between the parties. This when I come to resolve the wife’s ancillary relief application, and I so order.