LML v. LSC

FCMC 12291 / 2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MATRIMONIAL CAUSES

NUMBER 12291 OF 2011

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J U D G M E N T
(Litigation funding)

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Introduction

1. This is an application by a Petitioner wife for litigation funding, pursuant to s.3 Matrimonial Proceedings and Property Ordinance, Cap 192 (MPPO).

2. In so far as maintenance itself is concerned, it is agreed that the husband shall continue to make monthly payments to the wife of GBP4, 000 per month as maintenance pending suit/interim maintenance for herself and the only child of the family K, who is now 17 years of age. In addition the husband undertakes to continue to pay for K’s school fees, tuition fees and extracurricular costs in the sum of GBP1, 900 per month. (See court order dated the 1 June 2012). Thus in total the husband is currently paying GBP5, 900 per month to the wife for herself and K.

3. In addition the husband contributed an additional HK$400,000 to cover the wife’s legal costs, up to and including the Financial Dispute Resolution hearing – which was originally set down for the 19 April 2013.  

4. On the face of it this was a fairly straightforward case that has recently taken a more litigious turn, with the husband asserting very late in the day, that shares held by him in family companies are in truth beneficially owned not by him, but by his father. He says that this is something that has always been known to the wife in any event. The husband’s father has now been joined in these proceedings as an intervener. Consequently this issue has been set down for a preliminary issues hearing in September. Unfortunately any hopes of a sensible settlement seem to have faded as a result with each side taking a more robust stand. Legal costs have begun to escalate on all sides as a result. In addition the wife has issued a section 17 application to set aside an alleged dilution of the husband’s shares in one of the family companies. Although the parties were previously involved in mediation – this has also come to a standstill.

The central issue

5. From a legal perspective the only issues to be determined at this stage are whether or not this is an appropriate case to award an element for litigation funding, and if so, in what amount?

Background

6. The parties married in September 1995 in the United Kingdom, which is where they have lived for most of their marriage. They are both ethnically Chinese with roots in Hong Kong. They were very young when they married – only 20 and 21 years old respectively and they were both students. They had one child, K, who has just turned 17 years of age. It is not disputed that originally both parties were financially supported by the husband’s father – i.e. the intervener. The husband’s mother also assisted in child care. Initially after completing their education both parties worked in the financial field. The wife has not worked, however, for the last 10 years and has concentrated her efforts on raising the parties’ son. The husband meanwhile is a Management Consultant with a large accountancy firm. The wife is now 39 and the husband 38 years of age. It seems that the marriage later ran into difficulties with each side making allegations against the other. The parties eventually separated in August 2011 and the husband subsequently relocated back to Hong Kong, which is where his parents and second sister live. The wife remained in the UK with K.   

The litigation to date

7. Initially it seems that the husband’s case was that he owned 49.77% of the shares in the family business – L Ltd. However his case now is that his father is the beneficial owner of these shares and that they should not form part of the so called “matrimonial pot”. It is anticipated that all sides will raise arguments with respect to the “financial resources” of the husband. As I have said there are also issues with respect to the dilution of the husband’s share holding and the allotment of shares in L Ltd. There are also other related issues that will need to be determined.

8. It is accepted that the wife did not initially have funds in order to embark on this litigation and consequently it was agreed that the husband would pay the wife HK$400,000 for that purpose – which was meant to take the parties up to the Financial Dispute Resolution hearing.

9. It is clear that the situation has now shifted considerably and that the wife fears being disadvantaged as a result. The husband says that he has incurred legal costs to date of HK$665,500, of which HK$184,918 has been paid. I have some difficulty with this estimation given that it is clear from the documents produced by the intervener that the following sums have been paid by the family companies to the husband’s solicitors presumably on account of costs:

(i)  12 June 2012 – HK$50,000

(ii)  24 January 2013 – HK$250,000.

10. In addition the husband received HK$534,000 on the 24 December 2012 as a special dividend from the intervener’s second family company LBS Ltd. The husband’s father says that he gave him that sum “knowing that he [the respondent] needed money for use because of his divorce proceedings”. Thus it seems that the husband received a sum of approximately HK$834,000 to assist in his divorce of which HK$200,000 was paid to the wife’s solicitors as part payment of the HK$400,000. Either additional sums were paid to the husband’s solicitors for his costs – or some of this money was spent on maintaining himself and the family.

11. According to the intervener, the husband received HK$1,428,031 in total for his personal use from the family company during the financial year 1 April 2012 – 31 March 2013 (see paragraph 16 (e) of the intervener’s 2^nd affirmation dated the 11 April 2013). This sum includes those sums referred to above. This amounts to approximately HK$119,000 per month.

12. The husband estimates that the preliminary issues hearing will cost him an additional HK$1.6 million. It is not clear how much the intervener’s costs will be – although they are also likely to be considerable. The wife originally estimated her costs for the hearing at HK$2 million.

13. The wife suggests that given that the husband receives funds from the family companies in addition to his salary, that this is something that the court can and should take into account when considering the issue of litigation funding. I accept that to be the case up to a point.

14. The husband for his part argues that the parties’ lifestyle has historically been modest. On his case he is currently paying maintenance in total of HK$70,800, from an income of HK$85,300. He says that he has outgoings of HK$138,025. It is not clear how the shortfall is met save from the additional monies received from the family companies and a recently acquired loan. He is living in a family property in Sai Kung rent free. Utilities and other outgoings appear historically to have been paid on his behalf.

15. The intervener says that although he had been willing to assist the husband previously that he will not do so going forward. He says that he will have his own legal costs to pay and that both sides will need to look to their own financial resources to fund this litigation as they see fit.  

Litigation costs

16. In so far as the law on the funding of litigation costs is concerned, it has been accepted by both counsel that Currey v Currey [2006] EWCA Civ 1338 is now routinely applied in Hong Kong and should therefore be relied upon in this instance.

   In Currey v Currey [2006] EWCA Civ 1338,

“the conditions for a ‘costs allowance’ are as follows:

(1) That the applicant spouse has no assets, or none that can reasonably be deployed (at para [19], [20]).

(2) That she can provide no security for borrowing, or none which can reasonably be offered (at paras [19], [20]).

(3) That she cannot reasonably obtain legal services by offering a charge on the outcome of the litigation (at para [20] and see Sears Tooth, per Wilson J).

(4)  That she cannot secure publicly funded legal help ‘at a level of expertise apt to the proceedings’ (at para [20])”

There is also a requirement to undertake an overarching enquiry

At para [20], Wilson J held that the initial, overarching enquiry should be into whether the applicant for a costs allowance could demonstrate that she cannot reasonably procure legal advice and representation by any other means. Therefore, to the extent that an applicant has assets (as in C v C), she has to demonstrate that they cannot reasonably be deployed (whether directly or as the means of raising a loan) in funding legal services …… Other factors may well come into play.  The subject matter of the proceedings would always be relevant, as would the reasonableness of the applicant’s stance in the proceedings.

(See K v C (FCMC 5508/2005, 7 August 2007 and HRT v RHT (FCMC 5488/2006, 21 June 2007 unreported)).

17. In addition specific reference was made by counsel to the English case TL v ML [2006] 1 FLR 1263 and in particular to paragraph 124:

[124] From these cases I derive the following principles:

(i)  The sole criterion to be applied in determining the application is ‘reasonableness’ (s 22 of the Matrimonial Causes Act 1973), which, to my mind, is synonymous with ‘fairness’.

(ii)  A very important factor in determining fairness is the marital standard of living (F v F).  This is not to say that the exercise is merely to replicate that standard (M v M).

(iii)  In every maintenance pending suit application there should be a specific maintenance pending suit budget which excludes capital or long-term expenditure, more aptly to be considered on a final hearing (F v F).  That budget should be examined critically in every case to exclude forensic exaggeration (F v F).

(iv)  Where the affidavit or Form E disclosure by the payer is obviously deficient, the court should not hesitate to make robust assumptions about his ability to pay.  The court is not confined to the mere say-so of the payer as to the extent of his income or resources (G v G, M v M).  In such a situation, the court should err in favour of the payee.

(v)  Where the paying party has historically been supported through the bounty of an outsider, and where the payer is asserting that the bounty had been curtailed, but where the position of the outsider is ambiguous or unclear, then the court is justified in assuming that the third party will continue to supply the bounty, at least until final trial (M v M).

In this case the intervener’s position is far from being ambiguous or unclear. He has clearly stated that he will not fund either party going forward.

18. Reference was also made by both sides to the leading Court of Appeal decision on the issue of maintenance pending suit and litigation funding namely HJFG v KCY [2012] 1 HKLRD 95, 28 October 2011. In that judgment The Honourable Mr Justice Hartmann said as follows:

The contribution towards the wife’s ongoing legal costs

  73. On behalf of the husband, Ms Stone submitted that, in light of existing authority, the wife had not made out a claim for a contribution towards her ongoing legal costs and that the Judge was therefore wrong to order any contribution towards those costs.

  74. Whatever may have been the position 10 years ago, it is no longer disputed that the words of s.3 of the Ordinance are wide enough to empower the Hong Kong courts to include an element towards a party’s legal costs in an order for maintenance pending suit: see KGL v CKY [2003] 2 HKLRD 301.

  75. In submitting that, in light of existing authority, the wife had not made out a claim for a contribution towards her costs, Ms Stone relied principally on guiding principles enunciated by Wilson LJ, as he then was, in Currey v Currey [2007] 1 FLR 946.

  76. Those principles have been adopted in the Matrimonial Division of the District Court: see H v H [2007] HKFLR 311.  To my knowledge, however, they have not been adopted in this Court or the Court of First Instance.

  77. Accordingly, before Jeremy Poon J, the guiding principles set out in Currey v Currey, while of persuasive value, were in no way binding on him.

  78. Section 3 of the Ordinance, of course, still required the Judge to be satisfied that any contribution towards the wife’s ongoing legal costs was reasonable.  That meant that he had to be able to conduct some analysis of the nature and extent and purpose of the contributions sought.  On the part of the wife, that required some breakdown of her anticipated costs.

  79. Aside from the fundamental requirement of supplying a sufficiently detailed breakdown of anticipated costs, I am of the view that the following principles articulated by Wilson LJ in Currey v Currey should in future be adopted as providing prudent guidance to both judges and practitioners in this jurisdiction.

19. It is therefore essential, in any application for litigation funding, that the applicant is able to supply the court with “a sufficiently detailed breakdown of anticipated costs”.

20. In addition Hartmann JJA said

82. The period over which an allowance for legal costs was to be paid was also considered by Wilson LJ to be a factor of considerable relevance.  Applications should not therefore expect that an order that the allowance be paid until the final determination of all proceedings will be the inevitable order.  It was observed that if the application for an allowance for legal costs was made before the FDR hearing, it may well be wise to order that the costs allowance should fund the applicant only up to that hearing:

The FDR appointment is a watershed and all reasonable inducements to both parties there to negotiate positively in the light of informal judicial indications should be in place.  The knowledge of a spouse in receipt of a costs allowance that, absent settlement at or in the immediate aftermath of the FDR, she will have to apply for a further allowance, which may or may not be granted, seems to me to amount only to a reasonable inducement, as opposed to improper pressure, to reach settlement.

  83. In this regard, as Wilson LJ pointed out, if the FDR hearing fails, it will be for the new Judge, on the basis of material properly before him – for example, rival open offers of settlements – to determine whether a new allowance for legal costs should be granted and, if so, in what amount.

  84. Those observations accord with my understanding of the Hong Kong FDR procedures.

  85. Wilson LJ spoke of a legal costs allowance being structured, especially as to its duration, so as to best encourage a spouse in receipt of the allowance to act reasonably, looking in good faith to try and reach settlement.  In KGL v CKY (p.219), this Court adopted the same fundamental reasoning albeit by reference to the spouse paying the allowance:

There is no reason why public funds should be expended to fund litigation when there are ample resources available within family funds.  With proposals for more active juridical involvement in pre-trial proceedings to restrict the incidence of costs this is in line with the modern approach.  The court can keep better control of litigation if it’s funding is at least in part within its purview. The party that controls the funds will be less willing to use them on unnecessary interlocutory procedures if he or she will have to provide funding for the other side.

21. In that case the Court of Appeal ordered that the wife should receive HK$500,000 per month by way of a contribution towards her litigation funding, such sum to be paid until the FDR hearing or until further order.  

22. There is also an issue with respect to the provision of litigation funding by the intervener, the respondent’s father. To that end reference is again made to paragraphs 84 – 88 of TL v ML, as redacted by Ms Yip, where Mostyn J said:

[84] … There is, in my view, a big difference between that state of affairs and what is urged on me here – an award that very substantially exceeds what is H’s, in the hope and expectation that CL will make up the difference.

[85] If it is said that the width of the words in Thomas clearly permit what is sought here, then that gives rise to a conundrum that I find myself unable to resolve. What happens if the person being encouraged says very politely ‘Thank you for your encouragement, but I have decided not to assist’? Or, as here, ‘I am only prepared to assist to such and such an extent’. Is the court supposed to ignore that stance and simply make an award on the basis that the assistance will be given? What happens if and when it is not? How is the court supposed to enforce its order? It could hard be said that the payer is in wilful default justifying a penalty under the Debtors Act 1869. It is for this reason that I expressed the view during argument that often the so called ‘judicious encouragement’ can turn out to be no more than mere empty rhetoric.

[86] I think that a clear distinction is to be drawn between, on the one hand, the position where the person being encouraged is a member of the payer’s family and, on the other hand, where he is a trustee in a fiduciary relationship with the payer. In the former case, the payee has no more than a mere spes of bounty which may, at the election of the provider, reasonably or unreasonably, be withheld. …

…

[88]  This exposition sets out with clarity the very difference nature of, on the one hand, the relationship between a fiduciary and his beneficiary; and, on the other, that of mere donor and done.  If the court makes a reasonable request of trustees to make funds available to meet an ancillary relief award, then it can assume that ordinarily the trustees will accede to such a request.  The same cannot be assumed of a request of a mere donor, for it is his prerogative to be unreasonable, if that is his inclination.  [Emphasis supplied]

Discussion

23. The wife asks for a contribution towards her litigation costs. However the basis for this and the amount that she is actually seeking remained unclear even at the date of the hearing. In his Reply Mr Clough asked for HK$1.25 million or HK$250,000 per month for the next 5 months. Initially the wife had said that she needed HK$2 million for the preliminary issues hearing.

24. The wife’s schedule of costs in Form H format and as attached to her affirmation of the 8 April 2013, did not provide an estimate of costs going forward. It simply stated that HK$957,405 had been paid up to date (i.e. to include the current hearing). This was of little assistance to the court and I accept was not K v K compliant. Upon hearing and reading those criticisms the wife produced a second estimate of costs during the hearing. Ms Yip complains, with some justification it seems to me, that the husband has had little opportunity to peruse this document or to comment on it, given that it was produced on the day of the trial. I accept that this was unfair to the husband. Of equal concern is the fact that the second bill was difficult to read and seemed to bear little if any resemblance to the original Form H. The wife’s anticipated costs for the preliminary issues trial was then put at HK$1,817,400. Again these figures seem to have been largely plucked out of the air – with very little thought given to them ahead of time. 

25. On the basis of these documents Mr Clough argued that the wife would need approximately HK$2,336,000 – although strangely this seems to include monies already paid (HK$400,000 by the husband and HK$136,000 by the wife). At the end of the day, as stated above, he sought HK1.25 million on the wife’s behalf. He accepts that the wife’s savings of HK1.3 million should be utilized by her as part payment towards her legal costs.

26. Finally the wife tried to make good her case after the event and filed a further breakdown of costs – which differs again from the previous two.  Understandably Ms Yip is very critical of this. I think she is right to be. I accept that the wife’s figures “wax and wane and are all over the place”.

The Curry principles

27. There is only one relevant property – namely the matrimonial home in the UK. I accept that it is not feasible for the wife to obtain security against this property in order to fund litigation in Hong Kong (point 2). I also accept that it would be virtually impossible for her to obtain legal services by offering a charge against the outcome of the litigation (point 3). Given that she is receiving maintenance of GBP4,000 per month and that the husband is also paying for other expenses for or on behalf of the child plus the fact that she has some savings, it seems to me that it would also be extremely unlikely that she would be eligible for legal aid (point 4).

28. Thus we are left with the fact that the wife presently has just over HK$1.3 million in bank accounts and in shares. Some of these monies came from the remortgage of the matrimonial home. The wife says in her updated Form E dated the 12 April 2013 that these monies should be put to one side for emergencies. Although Mr Clough seemed to concede this point and to have accepted that these funds would need to be utilized for legal fees, for the avoidance of doubt I confirm that to be the case (point 1).

Thus the only issue is whether or not the husband should be required to pay anything in addition to this sum?

Overarching enquiry

29. Notwithstanding the wife’s poor presentation of her case on the figures, I am conscious of the fact that there should as far as possible be equality of arms with respect to the hearing in September. I am also cognizant of the point made in TL v ML in paragraph 22 above. It seems however that the husband’s legal expenses have historically been met. It is important that the wife’s legal costs should likewise be met – although the sums seem very high in comparison to the husband’s. On the basis that the husband’s estimate of HK$1.6 million is correct I will order that the husband pay the wife an additional HK$300,000. I am satisfied that the husband does have the means to raise this sum – even if it means, as has been suggested by the intervener, that he sells his car. The wife will need to utilize her own savings of HK$1.3 million in addition for the purposes of the hearing. It is unclear to me precisely what the wife has paid and what is outstanding. I accept however the criticism that unbilled costs of HK$887,405 for a 19 day period from the 1 – 19 April seems extraordinarily high and out of all proportion to the work likely to have been done on the file during that period of time. 

Costs

30. Given that I have not come down entirely in favour of one side or the other and bearing in mind the criticisms that I have made in this judgment I will make an order nisi to be made absolute in 14 days time that there shall be no order as to costs. There shall be certificate for counsel.

31. Finally – a word of warning. This case has taken a turn for the worse. It is a case that in my view can and should settle – with a little good will on all sides. The alternative is likely to be huge and unrecoverable costs for all concerned. This is something that needs to be avoided if at all possible. With that in mind I will also direct that all parties attend a call over hearing on the 13 May 2013 at 12 noon for further directions.