TSANG CHIU WING FLORENCE (also known as LI TSANG, CHIU WING FLORENCE) v. LI KIN KAN SAMATHUR AND OTHERS

FAMV Nos. 38 & 39 of 2014

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NOS. 38 & 39 OF 2014 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL FROM CACV NO. 154 OF 2012)

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REASONS FOR DETERMINATION
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Mr Justice Ribeiro PJ :

1. At the hearing, we dismissed this application for leave to appeal for reasons to be provided.  These are our reasons.

2. The applicant (“W”) sought leave to appeal from the judgment of the Court of Appeal of 10 January 2014[1] which significantly reduced the amount of financial provision awarded her by Saunders J.[2]  She did so on the basis that questions of law of great general or public importance arise on the appeal and also on the “or otherwise” basis.

A.  Application on basis of questions law of great general or public importance

A.1  Question 1

3. Question 1 states as follows:

“Is a spouse entitled to structure his or her financial arrangements with a third party on the basis of an agreement with that third party that assets owned legally and beneficially by such spouse will be transferred to a third party in the event of divorce consensually and without opposition from such spouse?”

4. Aspects of the skeleton argument lodged on W’s behalf indicated that Mr Charles Howard QC[3] was seeking to argue that the arrangements entered into between the husband (“H”)[4] and his father (“STL”)[5] involving the “Framework Agreement” (“FA”) and the Special Articles (“SA”) were invalid as contrary to public policy.  That would, however, have been contrary to the position that he had consistently adopted for W below, namely, that the FA and SA were genuine documents and that he did not seek to impugn in any way the rights they conferred on H and STL.[6] 

5. After being pressed to explain his case, Mr Howard eventually submitted instead that the FA and SA should be treated as a species of nuptial agreement and should be subjected to the Court’s scrutiny as to the fairness of permitting those agreements to operate on the breakdown of marriage, along lines similar to those discussed in Granatino v Radmacher.[7] Mr Pointer QC objected since this was again a point never taken in the Courts below.  He contended that the FA and SA were not nuptial agreements and that, in any event, it was objectionable[8] for the point now to be run since evidence bearing on such fairness would have been differently presented and explored, had the point been raised at the trial.  We agreed with those objections.

A.2  Question 2

6. Question 2 states:

“Where the Court has, as a preliminary issue, made an order pursuant to s.17 MPPO setting aside a transfer of assets by a spouse to a third party, what is the true legal effect of the s.17 order viz the ownership of the asset or assets subject to the s.17 order? Specifically, is an order under s.17 MPPO merely to be equated with an interim injunction or does it have the effect of determining the beneficial ownership of the asset or assets?”

7. We did not consider Question 2 reasonably arguable.  Indeed, the question tends to answer itself: an order setting aside the transfer of an asset does precisely that – it nullifies the transfer, so that the asset reverts back to where it was prior to the transfer.  Nevertheless, Mr Howard sought to argue that the relevant order and undertaking went much further and somehow gave rise to an implied finding that the Japanese business was available for distribution to W, precluding further discussion of that issue.

8. That was rejected by the Court of Appeal which held that :

“The order in the s 17 proceedings only has the effect of setting aside the transactions and transfers executed pursuant to the 2006 CLA. Whilst the ownership of shares was restored to the husband, they were still subject to the rights of the father under the Framework Agreement and the Special Articles. Those documents had not been impugned at all. For reasons already discussed, the legal and beneficial ownership of the shares is not determinative of the question whether the valuation of the shares should take account of the adverse rights of the father under those documents.”[9]

9. Mr Howard sought to argue that an order made in compromising proceedings brought under section 17 of the Matrimonial Proceedings and Property Ordinance[10] necessarily implies findings reflecting the conditions referred to in section 17(1)(b)[11] and section 17(2)[12] which somehow supported his contention that the Japanese business was available for distribution to W.  He submitted that such findings were necessary to give the Court jurisdiction to make the order.  On the basis of such implied findings, Mr Howard argued that an issue estoppel came into existence preventing H and STL from denying that the Japanese business was available for distribution to W and preventing further litigation on the extent to which the Japanese business was subject to STL’s rights.

10. Those propositions are not reasonably arguable.  The section 17 order and undertaking arose out of the settlement of the proceedings and not, as Question 2 misleadingly suggests, out of the Court determining a preliminary issue.  They were made and given by consent as a result of the parties arriving at a compromise.  The Court obviously has jurisdiction to make such consent orders and to accept such undertakings.  The section 17 claim was dealt with first as a matter of case management, leaving the issue regarding STL’s rights over the Japanese business to be addressed in the pending ancillary relief hearing.  The conditions relevant to exercising jurisdiction under section 17 were never the subject of any final judicial determination on the merits[13] and it cannot reasonably be argued that any issue estoppel of the type suggested ever arose.  Moreover, Mr Howard’s submission contradicted the statement in his skeleton argument that the making of a section 17 order rendered the disposition of the Japanese business to STL void so that H was the sole legal and beneficial owner of that business “subject to STL’s rights under the [FA]...”.

A.3  Question 3

11. Question 3 is as follows:

“To what extent can (or should) the Court of Appeal interfere with primary findings of fact made by the trial judge? Specifically, the proposed appellant invites the Court of Final Appeal to give definitive guidance as to the parameters in which an appellate tribunal should substitute its own findings in the absence of hearing evidence and in place of ordering a retrial.”

12. How far the Court of Appeal should interfere with primary findings of fact is obviously necessarily fact-specific.  Question 3 cannot possibly be answered in the abstract.  In his skeleton argument,[14] Mr Howard sets out no less than 20 instances touching on a range of highly miscellaneous issues in respect of which he alleges the Court of Appeal wrongly substituted its own findings of fact for those made by Saunders J.  This Question certainly did not involve a question of law of great general or public importance. It was merely an invitation to the Court to retry the facts. 

13. In his oral submissions, Mr Howard focussed on what he said was the most crucial substituted finding of fact.  He submitted that the Court of Appeal had made such a substitution based on a misapprehension of Saunders J’s approach to assessing the likelihood of STL exercising his rights under the FA and SA so as to deplete the value of H’s assets available for distribution.  He accepted that this did not raise a point of law of general importance but submitted that this criticism should be entertained on the “or otherwise” ground.

14. We did not consider that criticism reasonably arguable.  The Court of Appeal found that the Judge had erred in law in adopting the approach set out in the following paragraphs of his judgment (the italics being supplied):

“204. In my view, it is not necessary to go so far as to require that it be established that the intended exercise of the father’s rights is a continuation of the conspiracy. The long-standing approach of the Family Court is to look through the facade of inter-family commercial structures and arrangements in order to discern the reality of the situation. If a loan exists, technically at law, or if rights in a person exist, strictly at law, but the reality is that the lender would not have demanded repayment of the loan, but for the breakdown of marriage, or the rights would not have been exercised, but for the breakdown of a marriage, then it is open to the matrimonial court to disregard that loan or those rights. Their existence may be appropriately reflected in the balancing exercise undertaken in determining whether or not to apply the sharing principle.”

205.  The initial gift, being a ‘retrievable gift’, might be styled a loan in the sense that there were circumstances when it might be repaid.  But the whole of the evidence overwhelmingly establishes that had the marriage not broken down, and the father’s relationship with the husband had continued as it was, prior to the breakdown, the father would never have exercised his rights.”

15. Similarly, in relation to the loans made by STL to H, Saunders J stated:

“230. I am quite satisfied that until the breakdown of the marriage it was simply never in the mind of either the father or the husband that there would ever be a requirement that the payments, even though they might be called loans, would ever have to be repaid to the father. They were soft loans and in the matrimonial balance sheet should not be taken into full account.”

“234. I am satisfied that the father had, prior to the breakdown of the marriage, no intention whatsoever to demand from the husband repayment of the amounts paid to his companies and invested in the various businesses.  If they may be styled “loans”, they were soft loans, never intended to be repaid.”

16. The Judge was therefore saying that even if the evidence compelled a finding that STL would have exercised his rights under the FA and SA and that he would have called the loans upon the breakdown of the parties’ marriage, the likelihood of his so acting was to be disregarded if such conduct was motivated by the breakdown.  His Lordship evidently thought that this was the correct approach to be adopted by the Family Court as a matter of law.  It was with that proposition that the Court of Appeal disagreed.  It was not concerned with substituting its own factual finding for one made by the Judge.

17. Having recorded the Judge’s approach set out in §204 and noted that he had applied it in disregarding STL’s rights,[15] the Court of Appeal held that the question of whether such rights would be enforced was a highly fact-sensitive question.  It held that it was wrong to exclude the breakdown of marriage from his consideration of what was likely to happen in the foreseeable future:

“189. In our judgment, the criticism of Mr Pointer and Mr Todd in terms of the error of law on the part of the judge at para 204 of the Main Judgment is well founded. The court should take into account the likelihood of the exercise of the third party right because of the divorce. It is not against public policy for a third party to structure a bona fide business transaction with a husband or wife (whether before or after the marriage) so that in the event of divorce certain rights would become enforceable....”

“203. ...the approach of the judge was tainted by the error of law in para 204 as discussed above. Effectively, he had excluded from his consideration the probability of the father exercising his rights due to the divorce between the husband and the wife.”

18. The Court of Appeal continued:

“205. Mr Todd submitted that the judge effectively made a finding that the father would exercise his rights in the event of a divorce. The judge did not say so in terms in his judgment. However, there are findings very close to that. His characterization of the D-Day exercise and the letter of 14 January 2009 as devices to frustrate the wife’s claims (paras 215 to 217) and his finding that the father considered the Japanese business to be his (para 224) are telling....”

“206. Coupled with the finding about the sentiment of the father at para 232 in the protection of his estate from claims from ‘another man’s daughter’, the inevitable conclusion is that had the judge given proper consideration to the likelihood of the exercise of the rights by the father in the event of the divorce, he would have come to the conclusion that the father would exercise his rights. This conclusion is also inevitable in view of his demand for the PNA to be executed at the time when the investment was made in the Japanese business and the secrecy in the cancellation of it, the active participation of the father in the ancillary relief application and his notice of intention to exercise the option in the letter of 21 February 2009. In such circumstances, it would be perverse for a court to find it is unlikely that the father would exercise his rights under the Framework Agreement in the event of divorce.”

19. We share the Court of Appeal’s reading of Saunders J’s judgment on this point.  The Judge effectively found that on the evidence, STL would exercise his rights to deplete the value of H’s assets but that such conclusion should be disregarded as a matter of law because, in so acting, STL would be motivated by the breakdown of marriage.  We accordingly did not accept Mr Howard’s criticism nor did we see any reasonably arguable basis for contending that the Court of Appeal was wrong in its own approach. There was plainly no basis for granting leave on the “or otherwise” basis.

A.4  Question 4

20. Question 4 is formulated as follows:

Given the inquisitorial function of the Court in matrimonial proceedings:

(a) Is it necessary for a party wishing to rely on documents adduced by another party to those proceedings (whether pursuant to specific orders for discovery or as part of the ongoing duty of full and frank disclosure) to strictly prove those documents?

(b) What is the correct application of the collateral evidence rule: a) In ancillary relief proceedings generally; and/or b) in ancillary relief proceedings where “conduct” is in issue; and/or c) where a witness is cross-examined as to credit (as Saunders J correctly held the Husband and STL could be) see “or otherwise” grounds 1 and 2 herein at paragraphs 94 to 105 below.

21. Far from being a question raising issues of law of great general or public importance, this question should not have had to trouble the Courts at all.  The controversy between the parties is simply the consequence of their ill-advised failure to adhere to Practice Direction 5.6 para 3 which requires bundles of documents to be agreed, explicitly marked to show precisely what has been agreed regarding each document: as to authenticity; as to contents or only as to inclusion.  As the Court of Appeal pointed out,[16] the more complex a trial and the more voluminous the documents, the more important it is that the evidential status of the documents be clearly defined. 

A.5  Question 5

22. Question 5 asks:

Can parties to matrimonial proceedings refuse to answer a question or disclose a document in reliance on the privilege against self incrimination given the decision of the English Court of (Criminal) Appeal in R v K [2010] QB 343?

23. H had sought leave to raise this question in his earlier application for leave to appeal.[17] W had resisted leave, stating that no point of the requisite general importance was raised.  The Appeal Committee refused H leave.  It was incongruous that W should seek to raise the same point in the present application.  The question in any event has little bearing on the ancillary relief issues dealt with in the judgment of the Court of Appeal from which leave to appeal is sought.

A.6  Question 6

24. This is formulated as follows:

“In circumstances where the Court has found that both Husband and Wife contributed equally to the running of a business – a business that was started with seed corn capital from a third party relative but the value of which far outstripped the value of the initial gift by the date of separation – are the spouses entitled to share equally in the business assets (and, in any event, in the value of the growth of the business assets during the marriage)?”

25. This question would only arise if W succeeded in reversing the Court of Appeal’s judgment which confines her to the needs award assessed by Saunders J.  As this has now been excluded, Question 6 does not arise.

B.  Application on the “or otherwise” basis

26. It is well-known that it is only in quite exceptional cases that leave to appeal will be granted on the “or otherwise” basis.[18] Recently, the Appeal Committee[19] issued a reminder that any application on this ground should state with clarity in the application itself why it is suggested that the matters in question may support leave to appeal under the “or otherwise”.  

27. In the present application, many of the grounds advanced on the “or otherwise” basis were re-iterations of issues already cast as “questions of law of great general or public importance”.  Others raised collateral issues which do not justify leave on this exceptional basis.

28. Mr Howard centred his oral submissions on two complaints: (i) a criticism of the Court of Appeal’s reversal of Saunders J’s award of a “fighting fund” in W’s favour; and (ii) the Court of Appeal’s treatment of costs recovered by W as part of her resources to be taken into account in arriving at her net award.

B.1  Fighting fund

29. Saunders J awarded W a “fighting fund” in the sum of HK$60 million having found that STL “has made plain that he intends to pursue the wife and her parents in litigation for what he contends are wrongful acts on their part to his disadvantage, in the discharge of their duties as officers of various companies, and the wife in their personal capacity”.[20]  His Lordship made the award, commenting that:

“[W] should not have to have recourse to her ancillary relief entitlement to fight what appears to be entirely unjustified and vindictive litigation. Nothing was suggested during the course of the present proceedings which would justify any legal action by the father against the wife or her parents. To the contrary, the evidence tended to establish that the acts of the wife or her parents were all acts undertaken at the direction of the husband. In my view further satellite litigation arising from these proceedings would be both futile and a complete waste of money.”[21]

30. Referring to an offer that STL had made to release W and her parents in certain circumstances, Saunders J directed that if such a release was forthcoming, the amount of the fighting fund should be deducted from the award amount made in W’s favour.[22]

31. The Court of Appeal set this award aside.  Mr Howard’s criticised it for doing so, contending that it had failed to appreciate that W faced a real risk of hostile litigation by STL arising out of the SA.

32. We did not accept that criticism.  The Court of Appeal gave the question careful consideration.  Having examined English[23] and Hong Kong[24] decisions, it held that the Court had jurisdiction to make such an award but that its power to do so had to be exercised cautiously and only in cases where this was truly justified.  It identified a number of factors relevant to the Court’s discretion including the likelihood of the anticipated future litigation; its nature and merits; the ability to recover costs in such litigation; the resources already available and the unfairness of such an award to the other side.  It also noted the need to ensure that there was no double recovery of costs and that unused funds would be returned.[25]  Plainly, it was right to require any potential award to be subjected to a careful discretionary assessment.

33. In the present case, STL had indeed threatened proceedings but he had not yet commenced any actions.  Bearing in mind the scepticism which the Judge had expressed as to the merits of any such proceedings, the Court of Appeal was fully entitled to conclude that the discretionary factors pointed away from the making of an award[26] and that, if and when he did bring a claim,  the law provided numerous protective responses against unmeritorious proceedings:

“Should such claims be brought in future, there are (at least in Hong Kong) avenues open to the wife and her parents to protect their position in relation to them: by applications to strike out, if the claims are thought to be wholly unmeritorious; by applications for security for costs, if the circumstances justify such an application; orders for costs, if appropriate on an enhanced scale of taxation, if the claims ultimately fail; applications to join the husband as a party and to seek an indemnity or contribution from him, if it is the case that he was (as the judge seems to have thought) the person at whose behest steps were taken that exposed the wife and her parents to potential liability to the father.”[27]

34. The Court of Appeal added that it was in any event not possible at this stage to agree with the Judge’s view that any litigation against W and her parents would necessarily be unjustified or purely vindictive.  If any future proceedings were in fact meritorious, it is difficult to see why the costs of the defence should be underwritten by the other side.  In any event, as the Court of Appeal pointed out, W had significant resources of her own and ample means to defend herself if necessary.[28]

35. The Court of Appeal’s approach involved a proper exercise of a multi-faceted discretion which had been lacking in the Judge’s decision.  We saw no basis for granting leave to challenge its approach.

B.2  Treating costs recovered as part of W’s resources

36. The Court of Appeal accepted H’s argument that costs totalling some HK$37.6 million receivable by W in respect of (i) her costs recoverable on an indemnity basis in the section 17 and fraud proceedings; and (ii) fees charged by her acting as her own solicitor; ought properly to be recognized as part of W’s resources and so deducted from the net needs award payable by H (as underwritten by STL).  Making an allowance for sums likely to be taxed off, the Court of Appeal assessed the value of these receivables at HK$30 million.

37. Mr Howard submitted that leave to appeal should be given because the Court of Appeal’s decision had the unacceptable consequence of permitting H and STL to behave badly in the litigation with impunity: they could behave badly, agree to pay indemnity costs and then get the money back by claiming credit for those costs against the needs award.

38. We did not accept that argument.  W had incurred costs in the section 17 proceedings and would have been out of pocket and thus had her resources diminished if those costs had not been recovered.  The costs order made in her favour operated to recoup her expenditure.  Upon her receiving payment, she would (subject to amounts taxed off) have had her resources restored to what they had been prior to the incurring of costs.  “Misbehaviour” was penalised in the indemnity scale of costs allowed. Fees billed for work done, when received, would obviously be an addition to W’s resources.  We considered it plain that the costs recovered and her fees charged formed part of her resources for the purposes of quantifying her needs award. 

39. On Mr Howard’s argument, W would be awarded the full amount of her needs award and then receive on top of that sum, the costs and fees receivable by her.  We could see no principled basis for a needs award to be exceeded in that way.  The court does not engage in an atomised examination of particular receivables to decide whether such sums should be disregarded in assessing a party’s needs with a view to promoting some extraneous policy, such as a policy of penalising bad litigation behaviour.

40. For the foregoing reasons, we dismissed the leave application with costs.