AEM v. VFM

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MATRIMONIAL CAUSES

SUIT NO. 4070 OF 1990

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BETWEEN

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(Variation of periodical payments)

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J U D G M E N T

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1.  This is the Respondent Husband’s application by way of a summons dated 19^th February 2009 for a variation downwards of the periodical payments that he makes to the Petitioner Wife under an order of this court made on 12^th May 2006 as varied by the Court of Appeal on 10^th January 2008.

2.  The relevant part of the said order of 12^th May 2006, the result of another variation application between the parties, and for variation upwards by the Wife on that occasion, was for the Husband to increase the periodical payments for her to £50,000 per annum by equal monthly instalments with annual increment of 5% (A1 : 148), which was as noted above subsequently varied by the Court of Appeal, as a result of the Husband’s appeal, on 10^th January 2008 to the extent that the annual increment be reduced to 3.59% (A1 : 150a).     

3.  The Husband by way of his said summons now seeks an order that the said periodical payments be reduced or discharged where appropriate on the basis that the Wife’s capital financial position has considerably improved  by a substantial inheritance from the estate of her late mother, and that she is now cohabiting with another man.  

4.  There is no question of the Husband’s ability to pay, and that he does not rely upon any material change in his own financial position, while it is also common ground that upon the Wife’s receipt of the inheritance which has a value in excess of £610,000, and her sharing a home with a gentleman KM, which would form a material change of circumstances on her part as the basis for reduction or extinguishing the existing maintenance order, but rather the extent of such reduction that constitutes the main issue for the court’s determination.

Background

5.  As is apparent above, the parties have been back to court on more than a few occasions since their divorce some 21 years ago in 1990 which, as pointed out by the Husband, has been longer than they were married, and a rundown of their background can be found in either of my judgments for their previous variation applications over the years, namely on 30^th July 1998 or 12^th May 2006. I do not therefore propose to repeat them here again other than perhaps the most relevant ones and a quick update of the parties since the last order.

6.  When their divorced was finalised in 1991, the parties were able to reach what I described in one of my earlier judgments a “comprehensive and detailed settlement with terms and conditions covering all … assets and properties as well as their future and long term needs and obligations and those of the children” which were subsequently made an order of the court on 27^th August 1991. It would be relevant to also mention here that the Wife was then a part-time secretary, while the Husband was, and still is, a director of a company listed in Hong Kong, and their 2 children were still under 18 and whose custody had been granted jointly to the parties with care and control to the Wife.

7.  Under that settlement she received, according to the Husband, about two-thirds of the assets by value at the time by way of a lump sum and settlement of certain property in UK, plus periodical payments, the subject of the variation application now before me, then at the rate of HK$16,250 per month with an annual increment by the lower of the Retail Price Index in the country she was to reside or the increase to his salary.

8.  In 1994 the Wife returned to her home country in UK and reached a new agreement with the Husband in respect of the periodical payments at the rate of £2,336 per month subject to the same annual increment. In 1997 she made her 1^st application before this court for variation upwards of the periodical payments which was strenuously opposed by the Husband who had shortly after the divorce remarried with a new family, and after a 6-days hearing which was only concluded in July 1998, I allowed her application by increasing the periodical payments to £3,000 per month.

9.  8 years later in 2006 the Wife applied again for variation upwards of her periodical payments, with the hearing on this occasion lasting 3 days and the result has already been referred to above in paragraph 2. As also noted above, she has since received substantial inheritance from her mother’s estate, and since about mid-2007 been cohabiting with KM in her home in Thorndon, which prompted the Husband’s present application.

10.  After exchanging their Form E in May 2009, followed by the inevitable process for further disclosure and discovery by both parties, the trial, their third since their divorce, finally took place 2 years later in May 2011, with both sides represented by Senior Counsel, Mr Pilbrow for the Wife, and Mr Coleman for the Husband.

11.  As noted at the beginning of this judgment, the Husband’s case is that with the substantial inheritance that the Wife has now received, and with the contribution from KM towards her expenses, and given the lengthy lapse of years since their divorce when both parties have formed new relationship, his financial obligation to her should be substantially reduced if not extinguished altogether.

12.  The Wife accepts that proper adjustment should be made to her periodical payments due to the said material change in her financial circumstances, but submits that the law requires the court to also take into consideration of other circumstances such as the Husband’s wealth and life style when deciding on the extent of such reduction. It would therefore be appropriate to first set out the law and principles applicable to such application.                            

Applicable Legal Principles

13.  This being the 3^rd variation applications of the parties that have come before me, I have in fact already in my earlier judgments reviewed the law governing such applications and which can be found in the trial bundles for the present application. Suffice it to say that under s 11 of Matrimonial Proceedings and Property Ordinance, Cap. 192 (MPPO) upon which the application is founded, it is specifically stipulated in (7) that “the court shall have regard to all the circumstances of the case, including any change in any of the matters to which the court is was required to have regard when making the order to which the application relates and, where the party against whom the order was made has died, the changed circumstances resulting from his or her death.”

14.  Hence the court does not just look at any material change in the financial circumstances of one or both of the parties, but also all the other circumstances that are relevant. The proper approach has in fact been summarised by the Court of Appeal in the 2^nd variation application  of this case (2008 HKFLR 106) in that the court should look at the matter afresh and make an order that is reasonable in the current circumstances, including to what extent the means of the parties have changed since the previous order was made, as well as those matters under s 7 of MPPO in order to achieve fairness within the context of these matters and all the circumstances of the case.

15.  Accordingly and in the light of these principles, I shall proceed to consider the evidence of the relevant circumstances, starting with the Wife’s financial circumstances and of course the 2 aforesaid material changes therein.

Wife’s Financial Circumstances

16.  The Wife who will be 62 next month relies mainly on the current monthly maintenance of £4,933 net (HK$59,196) from the Husband, plus some interest payments from banks on her savings and investment averaging about £1,600 per month, her State Pension of about £400 per month, as well as contribution from KM towards some of her household expenses in the sum of £102 per month.

17.  In her Form E of May 2009 she put her net total assets at just over HK$12 million, mainly her home at Thorndon valued at just below HK$5 million, and her capital assets in cash and stocks therefore of about HK$7.1 million, the bulk of which no doubt the result of the inheritance (A : 179). Mr Coleman for the Husband suspects that the up to date actual figures should be higher, as he argues that the Wife has attempted to reduce them by making deductions for payments not actually made, such as the money which she has said should have been given to the son for his wedding but not yet as he had not given his bank account details, nor has she accounted for the sums paid for the benefit of the daughter.

18.  Having seen and heard the Wife in evidence however, I do not find Mr Coleman’s such criticisms justified. In any event the amount of such sums involved do not seem to me significant enough to impact on her overall capital assets situation which, as a result of the inheritance, has caused the income earned from capital to increase substantially, providing her a net sum of £19,343 for the year up to April 2010, or an average of £1,612 per month (C : 223 – 226 and P4).   

19.  She has set out her expenses in paragraph 3 of her affidavit (A : 269) at £6,134 (HK$74,455) per month which she says have already taken into account of KM’s monthly contribution of about £102, but her present budget for her travel and holiday expenses will no longer be sufficient in future as both hotels and travel costs have risen sharply this year based on her experience of her 2 recent trips to Beijing, and that she has had to reduce her spending on other items such as clothing and personal grooming to meet her budget.   

20.  Her expenses are essentially of 2 parts : General Household and Personal, of which she puts the former at £4,093, and £2,041 for the latter. For obvious reason most of KM’s contribution  would have been for the expenses of the household which he shares with the Wife, such as utilities of £459, food of £211 and other common household items of £643, but if KM is to share such expenses equally with the Wife, and I do not see why it should not be the case, then his contribution of £102 indeed appears unreasonably low.

21.  The Wife’s explanation is that she did not think it would be appropriate for KM to bear any of the “ownership” costs such as repairs, maintenance, improvements and insurance as opposed to the “running” costs such as electricity and water. While there may be a point in it, it seems that his current contribution towards such running costs is far less than what should be his equal half-share, while there is no reason why he should not be sharing other household expenses such as food and other household items of the Wife.

22.  KM has in fact filed an affidavit and actually come from UK to give evidence at the trial for the Wife. He is a 66 years old retired solicitor, divorced and has no dependents.  He confirmed that he moved into the Wife’s house in September 2007 following the sale of his own house in Essex. He also has a half-share in another house in Essex which he hopes to sell for £300,000 and to use his share of the proceeds to buy a small 2- bedrooms house. In all he puts his capital and property at £596,750, with an annual income of £32,555 and annual expenditure of £30,284. It seems clear to me that he does have the means to make a higher contribution towards his fair share of the Wife’s running household expenses.

23.  There is another item of the Wife’s general expenses that has attracted criticism from the Husband, that is the element of legal costs for this application and any future applications which was accepted in cross-examination to be about £1,500 per month, but which Mr Coleman argues as baseless and should not be treated as a recurring expense, hence he submits that if a proper contribution were received from KM, the monthly expenses that the Wife would be required to meet would fall to around or below £4,000 (or below £48,000 per year).

24.  Mr Pilbrow for the Wife accepts that while an allowance for legal costs is not normally considered a recurring expense, he argues that unless the Husband is prepared to contemplate a once and for all settlement, the manner in which this case continues, it would represent a recurring expense. What is apparent, he submits, the Wife’s expenses are those of a lady who lives modestly and without the luxury which the Husband’s wealth may entitle her to, hence the court should accept that she is entitled to a lifestyle costing in the region of £75,000 per annum  without the need for closer examination, as to meet this sum the Husband contributes a mere £60,000 per annum out of his annual income of £1.15 million. He therefore submits that, without further factors, no court would consider any reduction in the present level of periodical payments given the Husband’s wealth and lifestyle, of which I shall now turn to.

Husband’s Financial Circumstances

25.  As indicated above the Husband does not now seek to establish that there has been any material change in his financial position, although as pointed out by Mr Pilbrow for the Wife, at the time of the issue of his summons and the filing of his updated Financial Statement (Form E) in May 2009, he did indicate that his application was made, inter alia, due to decline in his income/assets (A1 : 175), perhaps understandably so as a result of the Global Financial Crisis in 2008 given the nature of his job and income.

26.  At that time his income was stated at slightly over HK$280,000 per month while his gross capital assets, represented mainly by the VM 1995 Trust of which he is the settler and a beneficiary, were put at about HK$85.6 million but with a loan guarantee of HK$34 million. That was then but the annual report of his employer for 2010 showed that his income for the year ended 31^st December 2009 amounted to HK$14.88 million, giving an average of more than HK$1.2 million per month, while in cross-examination he also conceded his gross capital assets to have risen to at least HK$130 million. Mr Pilbrow therefore submits that the court should be entitled to draw the inference that the Husband is indeed a man of very substantial wealth and able to live a commensurate life-style.

27.  To illustrate the Husband’s lifestyle, Mr Pilbrow has cited various examples revealed in cross-examination in his submission, which can be summarised as follows :

(a)   He pays HK$70,000 per month to a service company that   meets his household expenses.

(b)   He pays his present wife HK$100,000 per month.

(c)   His basic salary has been increased to HK$183,800 per month on top of other benefits such as medical, car and air tickets.

(d)   His VM 1995 Trust’s shareholding in CITIC Pacific has increased by 1 million shares to 4.2 million shares, while the trust’s dividend income from its shares has averaged HK$4 million per annum.

(e)   It is believed that he has free access to the assets of the Trust as its Trustee will exercise its discretion in accordance with his wish.

(f)   During the period from April 2008 to July 2009 when he claims was “disastrous” for his employer, his spending on his American Express credit card averaged in excess of HK$100,000 per month. 

28.  Mr Pilbrow therefore submits that the Husband is able to meet without any discomfort any order this court may consider appropriate for the Wife, while at the same time to continue to lead a lifestyle of substantial luxury and comfort for himself and his family, hence it would not be fair or appropriate for the court to challenge her expenses.  

29.  I do not believe in the main that is the Husband’s argument, but rather that his remaining financial obligation to the Wife, after all these years of divorce, by way of the current periodical payments should be reduced accordingly or extinguished altogether by the material changes in her financial circumstances due to the substantial inheritance and her cohabitation, in particularly the former which Mr Coleman submits that it should be treated as a lump sum capable of generating an annual income by performing a quasi-reverse Duxbury calculation, by reference to the ‘At A Glance’ extract attached to his submission, and taking the age of the Wife at 62, the value of the inheritance would seem to provide an annual income of around £43,000 to £44,000, sufficiently to meet her needs and to discharge the periodical payment altogether.

30.  Whether that should be the case, it would be helpful to consider the relevant law, of which Mr Pilbrow has referred to some English authorities relating to variation as a result of inheritance, there being no Hong Kong authority on point that I am aware of.

The Law Relating to Variation as a Result of Inheritance

31.  The first case Mr Pilbrow referred to is Vaughan v Vaughan [2010] 2 FLR 242, a decision of the Court of Appeal which stated that it is usually inappropriate for the court to s0-call “Duxburyise” the capital of any inheritance to meet ongoing needs, approving an earlier judgment of Baron J in Lauder v Lauder [2007] 2 FLR 802 in that regard.

32.  In Vaughan where the court was faced with an application by a husband, 20 years after the divorce, to terminate the periodical payments to the wife, Lord Wilson said in the lead judgment :

“[42] More widely, we have received interesting arguments about the circumstances in which the law expects a spouse to apply not only income but capital to the meeting of maintenance needs or obligations. There is no doubt that the case in which (let us say) a wife is most clearly expected to apply capital to the meeting of her maintenance needs is when, at arm’s length following divorce, the husband agrees, or is ordered, to pay her a needs-based capital sum : such will still have been calculated by reference to the Duxbury formula, inherent in which is the principle of amortisation. There is, by contrast, no doubt that the court will not generally expect her to apply inherited capital (as opposed to the income generated therefrom) to the meeting of her maintenance needs : Lauder v Lauder [2007] EWFIC 1227 (Fam), [2007] 2 FLR 802, per Baron J, at [64]. But I am clear that it is impossible to be categorical about what the law expects in this area. No doubt there are circumstances in which it is reasonable to order a husband to make periodical payments even though his income is insufficient to support them and he will therefore have to make them wholly or partly out of his capital; and, correspondingly, no doubt there are circumstances (see, for example, my conclusion in this very case at [44] below) in which it is reasonable to expect a wife to apply capital to the meeting of at any rate some of her maintenance needs even if it has come into her hands by inheritance or, more generally, otherwise than as needs-based capital payment by the husband. Perhaps particularly when they reach or approach retirement and have reasonably significant capital assets (often the product of savings out of income), many people treat the distinction between income and capital as fluid; the court will recognise this reality.”

33.  Mr Pilbrow points out that there can be no similarity in this case to one where a husband is required to resort to capital as a result of having insufficient income, and refers specifically to the precise point of Baron J in paragraph 64 of her judgment in Lauder, and approved in Vaughan,  where she said :

“I note that she has about L130,000 from her own inheritance and arising from maintenance arrears, which the district judge rightly found that the wife should not have to Duxburyise to assist with long term expenditure.”

34.  It is therefore Mr Pilbrow’s submissions that it is clear from the authorities that income generated from wealth inherited by the payee of a maintenance order is a factor, which the court may take into account. What percentage of such income is to be taken into account obviously lies in the discretion of the court, which is required to look at all the circumstances of the case prevailing at the time of the application to vary. He submits that the court may like, when assessing the Wife’s needs ‘generously’, to view the income generated by her inheritance as being adequate to meet the balance of her expenses not presently met by the court’s order for periodical payments, which would be fair when reflecting upon the disparity of wealth and the lifestyle that is apparent the Husband believes is appropriate for his present wife.

35.  Mr Coleman on the other hand submits that the passage in the Vaughan case referred to is obiter, and itself refers to a passage in the Lauder case, which was simply a comment on the facts of that case and does not purport to be a statement of any general principle. More important, he submits, in the said passage of Vaughan is the last few lines which expressly recognise that as people reach retirement age, a fortiori if they already chosen to retire, as have the Wife and KM, the distinction between income and capital is more fluid.

36.  In this case, he submits, the logic must be as follows. Had the Wife already received the inheritance by the date of the last variation application in 2006, the capital and income available to her from that inheritance would undoubtedly have been taken into account by the court, and the amount of maintenance set would have been lower than was in fact set. Now that the inheritance has been received, and the circumstances simply now follow.

37.  He therefore submits that It is not open on the facts, nor as a matter of principle, simply to ignore the receipt of inheritance, or even to ignore the capital part of the inheritance, as it is a substantial capital sum which can and will generate a substantial income through amortization, while at this stage in the Wife’s life the distinction between capital and income is much more fluid anyway, which are all central circumstances to be taken into account in this application – that they are part of the main reasons for the application, and cannot be swept aside as though they do not exist.

38.  I agree that the inheritance that the Wife has received, both as to the income generated and its capital, is one of the circumstances that the court shall take into account, and that it is in the court’s discretion to decide to what extent it should have on the periodical payments in the circumstances of the case, which brings me to the effects of the other material change : the Wife’s cohabitation. First the law in relation thereto.

The Law in Relation to Cohabitation

39.  The law in this regard has recently been reviewed by the English Court of Appeal in Grey v Grey [2010] 1 FLR 1764, where the wife entered into what she accepted was a “fixed permanent” relationship with a man by whom she was at the time pregnant, and both Lord Justices Thorpe and Wall rejected the proposition that the law had evolved to recognize that once cohabitation was established, a periodical payment order should be dismissed, with Wall LJ stating as follows :

“[51] In my judgment, the law has not changed from that which it was when I commenced practice in 1969. Post-separation cohabitation with a third party is a relevant factor for the court to take into account when considering the level of maintenance pending suit and/or periodical payments which the cohabiting spouse or former spouse should receive from his or her spouse or former spouse. In some cases, the fact of cohabitation will weigh heavily in the scales; in others, it will not. As Thorpe LJ rightly states in para [28] of his judgment, the real question for the court is usually not what the third party is contributing but – as here - what ought he to be contributing?”

40.  Mr Pilbrow therefore submits that the court should reflect upon what contribution KM ought to pay in the light of his means and all those circumstances. The manner in which the Wife and KM have approached their arrangement is that KM would meet all expenses which incr ease  the cost to the Wife of living alone, but it is apparent that they maintain totally separate finances, that there is no financial commitment as one might expect in a marital relationship, and that KM has maintained that when funds become available from the sale of his jointly-owned property. It is his intention to purchase a property in his name. Whether he will move into that property is to be seen but it is clear that he recognizes that he has no equitable claim to the Wife’s house.  

41.  Mr Coleman however argues that the Wife and KM are clearly cohabiting in any ordinary sense or understanding of the word, and that their evidence that they do not know what might happen in the future is hardly convincing, while KM does not speak of moving into the property that he might buy with the proceeds from another property, but rather of investing.

42.  Mr Coleman submits that KM clearly does not contribute adequately or appropriately to the expenses of the Wife’s household, as his monthly sum of £102 amounts only to about one quarter of the utilities charges alone, that he pays nothing towards his housing costs albeit by living with the Wife he avoids having to pay rent or mortgage costs elsewhere, and is, if I may add, free to use his capital to generate income instead of meeting his housing needs.

43.  I agree with Mr Coleman that the evidence before the court, including their testimony, that the Wife and KM are clearly cohabiting in her house in the ordinary sense and meaning of that word, that it has been a close and stable relationship for almost 4 years, that there is no indication that it is in trouble or may end anytime soon, and certainly not demonstrated by the fact that KM has not only filed an affidavit in support of the Wife in this application disclosing obviously very private matters of his finance, but actually accompanied her to Hong Kong and to give evidence on her behalf at the trial.

44.  Of course nothing can be certain about their relationship in the future, when the same cannot even be said about marriages, but as matters now stand, as long as KM is cohabiting with the Wife in her house, the court should be looking at what he ought to be paying for that benefit, and I agree with Mr Coleman that he ought not just be contributing towards the utilities charges, which I agree is low, but also the household costs and expenses, and that no distinction should be made between what the Wife said to be ownership costs and running costs, as KM obviously uses the house and the garden, and has the benefit of the helper or cleaner. The Wife has put those expenses at around £1,340 per month, hence it would be fair in my judgment that KM ought to contribute not less than £600 for living in her house, and from what he has disclosed in his affirmation, I believe he has the means to do so.

45.  I also agree with Mr Coleman’s argument that it would not be appropriate for the Wife to include future legal costs of £1,500 per month as part of her normal recurring expenses, as while the parties have had to come back to court on more than a few occasions since their divorce, there is no certainty that it will recur again, although I must admit that that possibility can certainly not be ignored. In any event I do not think that provision will be necessary now that she has substantial capital from the inheritance.

Conclusion

46.  As noted above there was no other serious challenge to the Wife’s stated monthly expenses by the Husband, and after removing the item of future legal costs of £1,500, I have arrived at the following broad figures as to what I have found to be her monthly expenses, what KM ought to contribute towards her household expenses, and her various income :

47.  This leaves a figure of £24,000 per annum which the Wife would need from either the Husband by way of periodical payments, or as suggested by Mr Coleman from her capital through amortization, which brings me to the ultimate question : Is it fair for her to do so under the circumstances of the case?

48.  At the time of the hearing of the parties’ last application in 2006, the Wife had investable capital of about £100,000, which had subsequently been reduced further to about £70,000 until she inherited her mother’s estate which has since brought her capital situation to the present level. As pointed out by Mr Pilbrow, while the improvement brought by the inheritance to her capital situation is clearly substantial, it represents a mere fraction of the Husband’s capital and assets, and that her monthly needs before the above adjustments only amount to less than 1/10 of his average monthly income.

49.  There is no question that whatever assets and income the Husband has been able to amass since the divorce have nothing to do with the Wife, and his main financial obligations are clearly now to his present family, but “Duxburyising “ the Wife’s capital to meet her ongoing and future needs clearly have significant limitations, not least the uncertainties in trying to calculate the rate of return for any investment by the Wife over a long period which in her case would mean in excess of 20 years, and in particularly when very little evidence on this matter had been sought during the trial.

50.  The House of Lords, as it then was, in White v White [2001] 1 AC 596, [2001] 1 All ER 1, [2000] 2 FLR 981, HL recognised that inherent in the Duxbury calculation is unfairness in that, firstly, there is a paradox that the longer the marriage and hence the older the wife, the smaller the capital fund produced by the calculation which is based in part on her life expectancy, and secondly, as the capital fund is theoretically exhausted on the wife’s death, no provision is made for the natural parental wish to pass money to the next generation.

51.  In the present case both of the parties’ 2 adult children are in UK and clearly very close to the Wife, especially the daughter who is handicapped, the details of whose condition can be found in my earlier judgments, and while she is now married, there is no doubt in my mind that the Wife is still very much concerned for her and wants to make future provisions for her, but rightly or wrongly she is not expecting the same from the Husband, who appeared to considers it appropriate for the daughter to depend on state support for her livelihood in cross-examination at the hearing.

52.  Taking into account of the various degrees of uncertainty or insufficient evidence as to the Wife’s future situations, the great disparity in wealth and lifestyle between the parties, and for all those reasons I have given above, I do not think it would be fair in the circumstances that the Wife is required to use the capital of her inheritance to meet her needs so that the Husband’s financial obligation towards her can be discharged. Accordingly, I allow the Husband’s application only to the extent that the periodical payments be reduced to £24,000 per annum subject to the same annual increment as directed by the Court of Appeal in 2008, and that such reduction be dated back to the time of his application to commence on 1^st March 2009.

53.  As I have referred to it on more than a few occasions, this was already the 3^rd variation application that has come before me for adjudication. Given the state of litigations between the parties despite their divorce more than 21 years ago and living thousands of miles apart, resulting no doubt in substantial costs inflicted on them in terms of time, emotion and money over these years, I agree entirely with Mr Pilbrow that this case cries out for proper closure for the parties, and while it is accepted that our statute do not give the courts any power to capitalise periodical payments upon a variation application, I have no doubt that it would be in the best interests of both parties that it be done so for the Wife’s periodical payments, perhaps by reference to my findings in this judgment, so that they can truly and finally move on with their life.

54.  I shall now turn to the question of costs. I understand that there were without prejudice negotiations between the parties before the hearing, and they may now want to have their say on this matter, but nevertheless I propose to make no order as to costs at this stage, which is an order nisi to be made absolute at the expiration of 21 days. Lastly I wish to express my gratitude to both counsel for their most valuable assistance in what has been a very difficult case indeed.