LYH v. YHKB

CAMP 128/2022

[2022] HKCA 1601

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 128 OF 2022

(ON AN INTENDED APPEAL FROM FCMC NO. 2164 OF 2009)

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D E C I S I O N

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Hon Cheung JA (giving the Decision of the Court) :

I.  Background

1.  This is a renewed application by the respondent husband (‘husband’) for leave to appeal against the judgment of H H Judge Grace Chan dated 28 December 2021 (‘Judgment’) and stay of execution of the Judgment. The husband’s earlier application for leave to appeal and stay of execution was refused by the Judge on 12 April 2022 (‘Leave Decision’).

2.  The petitioner wife (‘wife’) and the husband were married in 1988. The parties separated when the husband moved out of the matrimonial home in March 2008. The wife petitioned for divorce in 2009. Decree nisi of the divorce was made on 25 May 2009 and decree absolute was made on 6 July 2010. On 14 June 2010, a consent order for ancillary relief (‘Consent Order’) was made. The Consent Order was made pursuant to a consent summons of the parties filed by 1 June 2010. The Consent Order was subsequently varied by consent on 22 September 2010. The variation was pursuant to another consent summons of the parties filed on 15 September 2010. At the time when the Consent Order was made, the parties relied on a valuation report prepared by Tact Management Limited (‘Tact Report’), which provided that the net asset value (‘NAV’) of their assets as at 31 December 2009 was about $60 million which included the NAV of the E Group (‘E Group’) at $21,394,872. The E Group was held by the husband and wife jointly. The Consent Order provided, inter alia, that the parties shared their net assets as stated in the Tact Report in equal share.

3.  The wife later discovered that the husband entered into an Asset Purchase Agreement (‘APA’) on 4 October 2010 whereby he sold the business of Eurotone Electric Limited (‘EEL’), a flagship company under the E Group, to Avnet Technology Hong Kong Ltd (‘Avnet’) and received a total amount of about $135 million (‘the Sum’) from Avnet following the sale. The Sum consists of (1) an upfront fee of $77 million, (2) inventory costs of $20.761 million and (3) a net settlement sum of $37.4 million in respect of a legal action commenced by the husband and EEL against Avnet.

4.  The wife applied to set aside the Consent Order on the ground of material non‑disclosure. Upon the husband’s concession, B Chu J set aside the Consent Order on 4 December 2018. The question of whether the wife should be awarded any further ancillary relief following the setting aside of the Consent Order fell to be determined by the Judge. After a 5‑day trial, the Judge ordered the husband to pay the wife a lump sum of $79.5 million, which comprises of $67.5 million representing half of the Sum and $12 million as compensation for not receiving her additional award earlier.

II.  The Judgment

5.  It was common ground at trial that the fundamental question for the Judge was whether the wife should be entitled to share any part of the Sum (Judgment [45] and [48]).

6.  In [49] of the Judgment, the Judge identified the factual issues as follows :

1)  When did the negotiation for the sale of the business of EEL start to take place?

2)  Whether the Sum is a non-marital asset and whether the wife is entitled to any portion of it?

3)  Whether the value of the companies held by Madam D, the husband’s new wife, or any part thereof should be taken into account in computing the size of the husband’s current assets and/or his financial resources?

7.  The Judge made the following findings :

1)  Avnet first approached the husband, or vice versa, before 8 June 2010 for the potential sale and purchase of EEL, but he failed to make full and frank disclosure of the same to the wife (Judgment [113]). This was after the consent summons of 1 June 2010 and before the Consent Order of 14 June 2010. Had the husband informed the wife about the preliminary negotiation with Avnet for the potential sale and purchase of EEL before or at the time when the consent summons dated 1 June 2010 was signed, it is more likely than not that the wife would not have accepted the methodology of valuation in the Tact Report and that she would not have agreed the settlement on her ancillary relief without making further discovery on the negotiation with Avnet (Judgment [114]).

2)  EEL was set up in 1993 during the parties’ marriage. Both parties were the joint shareholders and joint directors (Judgment [26] and [144]). The Sum is the fruit of the sale of EEL built up and flourished by the joint effort of the parties during their long marriage of about 20 years. The wife continued to contribute to EEL, even after the Consent Order and the grant of decree absolute, by providing personal guarantees and pledging the former matrimonial home for its benefits. The Sum is a marital asset which should be shared equally (Judgment [142], [148] and [163]).

3)  As to the husband’s financial resources, the Judge found that he has not fulfilled the duty of full and frank disclosure on his connection with or interest in Madam D’s business and that he had the financial ability to pay further ancillary relief (Judgement [168] and [169]).

8.  The Judge saw no reason to depart from the sharing principle and awarded half of the Sum to the wife.

9.  As to the compensation for not getting her additional award earlier, the Judge held that the wife was conservative in investment and would have placed the additional award in a fixed deposit account rather than investing the same in the property market (Judgment [186] and [201]). The Judge rejected the wife’s claim of $26 million but only granted her compensation of $12 million. The Judge held that an average of 2% per annum should be adopted as the rate for fixed deposit (Judgment [202]).

III.  Intended grounds of appeal

10.  The husband’s intended grounds of appeal can be summarised as follows :

1)  The Judge erred in basing the award to the wife on the entirety of the upfront fee when some value of the entities in the sale had already been shared with the wife under the Consent Order (‘Ground 1(a)’).

2)  The Judge erred in basing the award to the wife on the entirety of the inventory costs since the Aged Inventory and the Old Inventory were already included in the Tact Report and thus were shared by the wife under the Consent Order (‘Ground 1(b)’).

3)  The Judge erred in basing the award to the wife on the net settlement sum as it was related to his employment with Avnet and represented future profits or projected future profits/bonus after the clean break (‘Ground 1(c)’).

4)  The Judge erred in adopting the sharing principle when there are significant departure factors (‘Ground 2’).

5)  The Judge erred in awarding a further amount of $12 million to the wife and not adopting a tapering approach or discount for post-separation or post‑clean break accrual (‘Ground 3’).

6)  The Judge erred in adopting the rate of 2% per annum as the rate of return for fixed deposit (‘Ground 4’).

IV.  Legal Principles

11.  Section 63A(2) of the District Court Ordinance, Cap. 336 provides that leave to appeal shall not be granted unless the appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard.

12.  In HK v BD, CACV 252/2009 & CACV 71/2010, 15 October 2010 at [14], Hartmann JA (as he then was) described the role of an appellate court in matters of ancillary relief as follows :

‘ 14. When determining matters of ancillary relief, in all but the simplest cases, a judge in the Family Court will be required to weigh up a large number of different considerations, giving to them what weight is appropriate in order to come to a decision as to the equitable distribution of the family assets. In making his determination, the judge will of course do so in fealty to the guidelines set down in s. 7 of the Matrimonial Proceedings and Property Ordinance, Cap. 192. But these guidelines, by their diversity and lack of hierarchy, are inherently flexible and purposefully so, designed to ensure a fair outcome in cases of widely different circumstance. But it has been said that fairness has a broad horizon. In seeking an equitable distribution of a matrimonial estate, an exercise based on judicial discretion, different judges will invariably come to different conclusions, each being reasonable. That being the case, it is only when a conclusion is plainly wrong, falling outside of the parameters of reasonable disagreement, that an appellate court will be entitled to interfere.’

V.  Our view

13.  We are not satisfied that the intended appeal has a reasonable prospect of success or there is some other reason in the interests of justice for the appeal to be heard.

14.  The theme of the submission of Ms Eu SC (together with Ms Chow and Mr Kwan) for the husband is that the wife received distribution of the family assets twice, once under the Consent Order and the second time by the order of the Judge. As a matter of mathematics, logic and fairness, the wife must give credit to the husband in the second distribution for what she had received under the Consent Order so that she would not have double recovery of the family assets. What the Judge had gone wrong is that she did not give credit to the husband for the money that the wife had already received and she had also ignored the nature of the sums paid by Avnet under the APA and the reasons used in the calculation of these sums.

15.  The approach adopted by the parties in the Court below is stated by the Judge as follows :

‘ 45. In this case, the parties hold the common ground that what have been implemented according to the Consent Order/Varied Consent Order should be left disturbed. They jointly identify the Sum received by the husband out of the sale of EEL as the discrete element of asset or isolated issue on which this court should focus and make determination. Such view is in line with the above English authorities and the wide discretion made available to the court under the said Practice Direction SL 10.3.’

16.  While what Ms Eu said about the wife requiring to give credit is a proposition that we are not prepared to disagree, when it comes to the real question of whether the Judge had failed to give credit in this case, it depends entirely on how the husband presented his case below. We have to say at the outset that the husband had not put forward any argument that the upfront fee should be reduced and he had not presented any evidence below on how this sum should be deducted so as to support his present argument that ‘at least some value of the entitles in the undisclosed sale had already been shared with the wife under the Consent Order’. Ms Eu’s response to this is simply that, with reference to the case of EBS v. NTCD [2021] HKCA 1775, it does not matter if the evidence was not available because the actual calculation could be canvassed in the appeal if leave to appeal is granted. We disagree. Because this evidence grounds the foundation of the husband’s case that the Judge had failed to give credit to the husband for what the wife had already received and the burden is on him to establish his case. It is totally unsatisfactory for this Court to proceed with the appeal with such glaring gaps in the evidence. After all, the task of this Court is to see whether the judgment below has gone wrong and as Mr Khaw SC (together with Ms Wong and Mr Lee) for the wife had submitted, it is not for this Court to do calculation as if it is trying the case in the first instance. The Flywin principle[1] clearly applies in this case. EBS does not establish any principle in terms of the approach in granting leave. After all, each case is different in its context.

17.  We will deal with the husband’s intended grounds of appeal in turn.

1)  Ground 1(a)

18.  Ground 1(a) concerns the upfront fee of $77 million paid by Avnet under clause 4.1(a) of the APA. In [7] of his written statement, the husband refers to the valuation of the E Group in the Tact Report and submits that the Judge failed to give credit that some value of the entities in the sale had been shared by the wife under the Consent Order. Specifically, the husband argues that in the Tact Report, the E Group (not including ED Limited) was valued at $21,394,872. EEL and Eurotone Shenzhen within the E Group were sold to Avnet in the APA. The inventory value ($17,567,975.75) in the Tact Report is subtracted from $21,394,872 to get $3,826,896.25, as the inventory value is dealt with by the Inventory Costs under the APA. Hence, the value of the E Group not yet shared with the wife under the Consent Order would be the difference between the portion of upfront fee to be shared ($77,000,000) and the value of the E Group less inventory ($3,826,896.25), which is $73,173,103.75.

19.  This is not a point that was advanced below by the husband. More importantly, in our view the husband’s submission is based on a false premise. As pointed out by the Judge, Mr Lee Kwok Wai who prepared the Tact Report had stated in his affirmation that he was instructed by the husband to prepare a report on the ‘net asset value’ of the parties; he was not engaged to do an assessment on ‘valuing the price’ of EEL or the E Group for ‘sale purpose’, or on ‘valuing the business’ as carried on by EEL or the E Group especially its/their ‘prospective profitability’. While the Tact Report relied on the E Group’s 2009 management account in arriving at its NAV, the asset as defined in clause 2.2 of the APA includes items like inventory, goodwill, benefit of distribution agreements, employees etc. There is no evidence on the correlation between the upfront $77 million which the husband now seeks to adjust downwards and the NAV of the E Group. As such, it is extremely artificial to say that the wife had already shared ‘some value of the entities in the undisclosed sale’ under the Consent Order.

20.  Further, the husband’s submission is inconsistent with his evidence at trial. In [82] of his 5^th affirmation, the husband stated that :

‘ 82. With reference to the matters said above, as said, the consideration paid under the APA was not meant to be what I owned in EEL or [E] group of companies as at the time of divorce nor the net worth of those companies as at the time of divorce. The consideration of HK$77M plus the HK$33M as subject to variation was indeed the projected profit of the Business of EEL in 3 years time after 4^th October 2010. The inventory of $20,671,000 largely consisted of inventory acquired by EEL after the divorce. For clarification and to avoid misunderstanding, there was no linking with the difference in the valuation of EEL and the [E] group of companies in the Tact Report and the consideration paid to me under the APA.’

21.  Senior counsel formerly acting for the husband at the trial also stated in his closing submission :

‘ D2. Value of the ‘assets’ purchased by Avnet

24. The Court has been brought to the relevant provisions in the APA to look at what was “purchased” by Avnet. According to clause 2.2 of the APA, besides inventory, Avnet also acquired from the Eurotone Group the goodwill of the Business, the benefit of the distribution agreements with Infineon and CT Concept, the employees and various information and records relating to the Business. Except inventory, these “assets” under clause 2.2 of the APA were not part of the NAV of the Eurotone Group as valued in the Tact Report.’

22.  In view of the above, we do not see how the Judge could be criticised for failing to deduct certain part of the upfront fee with reference to the valuation in the Tact Report.

23.  In putting forward his case that the upfront amount should be adjusted downwards, the husband further argued that the Judge failed to take into account the protective covenant in the APA, which, according to him, prevented him from running his own business for three years and was worth $9 million a year. This being future costs to be borne by the husband alone in return for the payment under the APA. We agree with the wife that these are new factual arguments which were never advanced by the husband at trial and accordingly should be barred by the Flywin principle. If the husband wishes to run this point then he should have raised it at the trial below so that the wife could properly address it.

2)  Ground 1(b)

24.  Ground 1(b) concerns the inventory costs of $20,671,000 paid by Avnet under clause 4.1(b) of the APA. The husband submits that the ‘Aged Inventory’ and the ‘Old Inventory’ (as defined in the APA) have already been taken into account in the Tact Report. He also submits that the ‘New Inventory’ was acquired after the valuation date of the Tact Report and its value should not be shared by the wife.

25.  The Judge had dealt with this argument in [124] [151] and [158] of the Judgment.

26.  As further pointed out by the Judge in [37] of the Leave Decision the valuation date of the Tact Report was 31 December 2009 and it was based on the 2009 management account. The APA was based on the management accounts in relation to January to August 2010. Old Inventory is defined in the APA as ‘all the inventory used for the Business and received into [EEL’s] warehouse on and before 31 December 2009 and which is considered, at the sole discretion of the [Avnet], to be in good and merchantable condition.’ Business is defined as ‘the business of [EEL] in relation to the distribution of the products of Infineon and CT‑Concept as well as the provision of related technical services in Hong Kong and the PRC’. First, it is incorrect for the husband to contend that the value of the ‘Aged Inventory’ has already been taken into account in the Tact Report because ‘Aged Inventory’ is defined in the APA as the inventory used for the business and received in EEL’s warehouse from 1 January 2010 to 31 March 2010 which were after the Tact Report valuation date. Ms Eu argued that inventory is ‘rolling’ in nature and the Judge was wrong to treat it as two sets of inventory that were available for sharing at two different times. Second, if the husband wishes to argue that the Old Inventory and the Aged Inventory in the APA included the inventory in the Tact Report, then he should adduce evidence on this point and not simply rely on the common term ‘inventory’ in the Tact Report and the APA.

27.  Further, the Judge has at [157] considered and rejected the husband’s argument that none of the inventories transferred to Avnet could be traced back to the period before the parties’ separation. The Judge held that :

‘ 158. Second, I accept that inventory is an essential tool for the operation of a business, and thus the value of inventory should logically be part and parcel of the value of EEL. The husband, who was the key person running EEL, was not able to provide a single piece of stock records to substantiate his claim that most, if not all, of the inventory purchased by Avnet was received after June 2010. Besides, I have doubt that most of the inventories purchased by Avnet under the APA was New Inventory. Notably, the husband/EEL could not possibly have such substantial amount of money to purchase new inventories after the Consent Order up to 15 October 2010 (ie the Inventory Completion Date in the APA), because he said in his affirmation that he was facing the “tremendous financial pressure” for making payment to the wife under the Consent Order, and eventually he decided to sell the business of EEL. He also deposed that “EEL was in severe financial difficulty with 85% liability over its assets.” Mr Li SC’s reference to the value of the inventories in the audited financial statements of ELL as at 31 December 2009 is already considered by me, but I do not think it helps to advance his case any further.’

28.  Ms Eu argued that the Judge’s approach is contradictory. On the one hand, she held that the inventory under the APA is not the inventory referred to in the Tact Report but on the other hand, she also held that the husband did not have sufficient funds to acquire the inventory under the APA. In our view, there is no conflict at all. All that the Judge did was to respond to the way the husband presented his case below.

29.  Therefore, we consider that the husband has not been able to demonstrate that the Judge’s analysis of the inventory costs is plainly wrong.

3)  Ground 1(c)

30.  Ground 1(c) concerns the net settlement sum of $37.4 million paid by Avnet to the husband in settlement of the legal dispute between him, EEL and Avnet. As the Judge had found below the husband was summarily dismissed by Avnet in April 2012 which was less than two years of the APA. In 2013, the husband and EEL commenced legal proceedings in Hong Kong against Avnet for breach of the Employment Agreement and the APA (‘Consolidated Action’), which was subsequently settled pursuant to a settlement agreement dated 5 June 2015. Under the settlement agreement, the husband and EEL received $38,000,000 from Avnet in June 2015, which was reduced to $37,400,000 after deduction of the legal costs. The crux of the husband’s argument is that this sum related to the wrongful dismissal of his employment with Avnet and the future profits of the new business after the sale to Avnet which the wife is not entitled to share.

31.  This argument has been addressed by the Judge in [159] to [161] of the Judgment. The Judge found that the APA and the employment agreement between the husband and Avnet, which was signed on the same date as the APA, is ‘one whole package’. She referred to the clauses in the APA and also the husband’s own evidence in [141] of his 5^th affirmation that the settlement sum should be paid to him ‘under the APA’.

32.  The relevant items under the APA are the Earn‑Out Payment and Earn‑Out Bonus. The Earn‑Out Payment is defined in Clause 1.1 of the APA as ‘additional payment for the purchase of the Assets’ and in Clause 5.1 of the APA as ‘further consideration of the Assets’ and is calculated according to the formulae set out at Clause 5.2 and capped at $33 million. The Earn‑Out Bonus is dependent on the future profits with reference to the Earn‑Out Payment formulae.

33.  Although the formulae referred to future profits, ultimately as the Judge found it was part of the package deal. The consolidated statement of claim of the husband and EEL specifically pleaded that the payment of Earn‑Out Payments and Earn‑Out Bonus by Avnet to EEL as ‘further considerations for the transfer of the Assets’. As the relevant time for considering the parties’ entitlement in an ancillary relief application is at the time of the hearing, the Judge was clearly entitled to take the settlement sums into account.

34.  Further, even if these sums are accrued post‑separation, the Court of Final Appeal in Kan Lai Kwan v. Poon Lok Otto (2014) 17 HKCFAR 414 at [134] recognized such sums could be subject to the equal sharing principle :

‘ 134. In my view, the increased Analogue Group profits do not provide a ground for departure from the equal sharing principle in the present case. The parties married in January 1968 and separated in mid‑2008, over 40 years later. The period of separation prior to the hearing date was relatively insignificant. The profits accruing to the Analogue Group during the post‑separation period arose out of the business which had been built up in the course of the marriage, in respect of which W can legitimately assert an unascertained share on the principles accepted in LKW v DD.’

35.  The Judge had fully identified all the relevant factors why she said the equal sharing principle should apply in the present case. In our view, the Judge was clearly entitled to make the finding against the husband on the evidence before her.

36.  In [13] of his written statement, the husband refers to Wells v Wells [2002] EWCA Civ 476 and complains that the Judge erred in failing to apply a declining percentage to the sharing of the net settlement sum. We agree with the wife that this point should not be entertained at all since it was not argued before the Judge either at trial or in the leave application below. We also do not accept Ms Eu’s submission that this is purely a point based on materials already available. As submitted by Mr Khaw, this can be a fact‑sensitive point.

4)  Ground 2

37.  Ground 2 challenges the Judge’s application of the equal sharing principle. The husband refers to [24] of Rossi v Rossi [2007] 1 FLR 790 at [24] (which was cited by the Judge in [130] of the Judgment) and submits that there are significant departure factors to be applied to the sharing of future profits. He also criticises the Judge for placing excessive emphasis on the wife’s contributions to the E Group when such contributions had little or no significance to the future profits of the new business after sale. This point was not seriously pursued by Ms Eu before us.

38.  We are not convinced that the Judge erred in applying the sharing principle on the facts of this case. We agree with the Judge’s views at [138] of the Judgment that the long marriage of the parties carries huge weight in the overall circumstances of the case and that the lapse of time between the separation in 2008 and the sale of EEL in 2010 is relatively short compared with the 20 years of marriage. The Judge also referred to a number of other matters, such as the fact that EEL and the E Group were set up in 1993 during their marriage and that they were joint shareholders and joint directors of EEL (Judgment [26] and [144]), the joint contribution to the initial set‑up capital of EEL (Judgment [146]), the division of marital roles (Judgment [142]) and the wife’s provision of personal guarantee and security for EEL and the E Group (Judgment [148] and [149]). These are matters which the Judge was entitled to take into account. Accordingly, we do not consider that there is any legitimate basis for this Court to intervene in the exercise of discretion by the Judge.

5)  Ground 3

39.  Ground 3 essentially ties in with Grounds 1 and 2. It must also fail in view of our conclusions above.

6)  Ground 4

40.  Under Ground 4, the husband submits that the Judge ought to have adopted the rate of 1% per annum in awarding the compensation to the wife for not receiving her additional award earlier. The husband relies on the wife’s evidence that she had purchased bonds with coupon rate of slightly above 1% in the past.

41.  As noted by the Judge, the husband in his reply closing submission for the trial accepted that the matter is one of discretion for the Judge, and he did not specifically challenge the rate of 2% suggested by the wife. Further, the Judge’s figure of 2% is also within the range identified by the Court of Final Appeal in Polyset Limited v Panhandat Ltd FACV 28/2000 :

‘ 13. The trial judge has a discretion to determine the rate of interest. To compensate a successful plaintiff for being kept out of his money, the general practice in Hong Kong has, at least since 1984, been to award interest reflecting the theoretical cost to the plaintiff of borrowing the sums withheld. This is a rate taken to be prime plus 1% unless the evidence in a particular case makes adoption of another rate appropriate: see Komala Deccof & Co SA v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) [1984] HKLR 219.

42.  In these circumstances, we are not satisfied that the Judge’s exercise of discretion falls outside of the parameters of reasonable disagreement which justifies the intervention of this Court.

7)  Stay of execution

43.  Since we have concluded that the husband’s intended appeal has no reasonable prospect of success, his application for stay of execution should also be dismissed.

VI.  Conclusion

44.  The husband’s application for leave to appeal and stay of execution is dismissed.

45.  We order the husband to pay the costs of this application with a certificate for two counsel on a party and party basis. The costs are to be summarily assessed. The husband is to file and serve his statement of objection to the wife’s Statement of Costs within 10 days.