LKF also known as LKFB also known as LKK v. LCYY also known as CYY

CACV 143/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 143 OF 2011

(ON APPEAL FROM HCMC NO. 2 OF 2009)

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REASONS FOR JUDGMENT

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Hon Kwan JA (giving the Reasons for Judgment of the Court):

1. On 8 July 2011, after hearing evidence over 13 days, Hartmann JA, sitting as an additional judge of the Court of First Instance, handed down his judgment in proceedings for ancillary relief (“the Judgment”). A corrigendum was issued on 9 September 2011 to correct two patent errors of calculation.

2. The only issue that the judge was required to determine in the ancillary relief proceedings was to ascertain the true value of the matrimonial estate, as it was always recognized that there should be an equal division of the estate, having regard to the length of the marriage, which had endured for more than 47 years, the considerable wealth accumulated by the parties, the contribution of both to the marriage and the accumulation of their joint wealth.  The reason the judge had to hear evidence over 13 days was because both parties had ignored their fundamental obligation to make full and frank disclosure of the assets in their possession.  Neither the husband nor the wife had impressed the judge as witnesses of the truth.

3. The judge was satisfied on the evidence that the wife had failed to disclose a total sum of $5.5 million by way of share purchases and moneys withdrawn from her account with the American Express Bank.  Making allowance for the fact that she might well have to spend about $1 million for living expenses during the period of litigation, he assessed the value of her undisclosed assets at $4.5 million.

4. As for the husband, the judge found that he had undisclosed business assets, being his business interests in the Mainland and in Hong Kong, and assessed these assets at a capital value of $25 million.

5. The judge held that the husband holds assets to the value of $71,601,626, while the wife holds assets to the value of $119,948,690.  He assessed the value of the joint matrimonial estate at $191,550,316, leaving a difference in favour of the wife of $24,173,532, which he rounded down to $24,170,000.

6. Applying the principle of equal division of the estate, the judge ordered the wife to transfer to the husband her entire shareholding in Benix Limited (a company holding a commercial property, owned by the parties in equal shares; “Benix”).  He valued the interest of the parties in Benix at $7 million each.  Deducting this figure from $24,170,000, the difference in favour of the wife was reduced to $17,170,000.  He left it to the parties to agree how this figure of $17,170,000 is to be made over to the husband in a way that best suits both parties.  In a subsequent ruling on 9 September 2011, he ordered both parties to bear their own costs in the ancillary relief proceedings.

7. The wife appealed against the order that she should pay $17,170,000 to the husband.  She sought an order this should be reduced to $13,170,000.

8. The husband cross-appealed, contending that the judgment should be varied in these respects: (1) the judge was wrong to find that he had undisclosed business assets of $25 million, this figure should be substituted by $1 million; (2) the wife’s assets should be increased by the amount of costs awarded to her against the husband in HCCW 150 of 2006 and the husband’s assets should be reduced correspondingly; (3) the wife should be ordered to transfer all her shares in Ngai Shing Machinery Company Limited (“Ngai Shing”) to the husband at the nominal consideration of $1; and (4) the assets to be transferred by the wife to the husband to achieve equal division of assets should as far as possible comprise landed properties acquired in the 1960s which have greatly appreciated in value.

9. At the conclusion of the hearing, we allowed the wife’s appeal and dismissed the husband’s cross appeal.  These are the reasons for our judgment.

The wife’s appeal

10. The wife’s appeal is concerned with the valuation of Benix.  The judge had attributed a value of $14 million to Benix.  He ordered the wife to transfer her 50% shareholding to the husband by effecting payment of equalisation money of $7 million.  The figure of $14 million would appear to have been arrived at by taking the value of the commercial property held by Benix agreed at $22 million and deducting from it about $8 million liabilities according to the financial statements of 2008 and 2009.  The balance sheet as at 31 March 2009 showed that of the liabilities of $8 million odd, about $5 million was owed to the husband and $3 million was a bank loan.

11. Ms Anita Yip, who appeared for the wife here and below, submitted that the judge had made two errors in the deduction of liabilities.

12. Firstly, the judge should have disregarded the bank loan of $3 million and deducted only $5 million as liabilities.  The bank loan was obtained in July 2009 on the authority of the husband without the wife’s consent and the reason for the bank loan was never made clear during the course of the husband’s evidence.  In paragraph 225 of the Judgment, the judge stated that he was not prepared to follow the accounts when no credible explanation was given why the wife should have to bear the liability of the bank loan obtained when the litigation was on going. In view of this finding of the judge, the wife should not have to bear half of the liability for the bank loan and only $5 million should have been deducted as liabilities.  Thus, instead of valuing Benix at $14 million, its valuation should be $17 million ($22 million - $5 million).

13. Secondly, in respect of the $5 million owed by Benix to the husband as a director’s loan, the deduction of this loan from the liabilities of Benix should result in a corresponding increase in the personal assets of the husband by the same figure.  The judge did not take this mathematical step.

14. In a subsequent hearing before the judge on 3 October 2011, in which the parties sought directions by way of clarification of the Judgment, the judge stated in paragraphs 5 and 6 of his ruling (“the Ruling”) that he was aware of the two loans referred to in paragraph 220 of the Judgment, they were not overlooked and he had taken them into consideration in the “general mix of matters” he considered relevant “when determining the value of the company for the purposes not of an audit but for the purposes of seeking an equitable division of the estate.”  He acknowledged that whether he should have taken the loan accounts into consideration “in a different way” is a matter for the appeal court.

15. Mr Tommy Lo submitted for the husband that the judge’s finding in paragraph 225 of the Judgment should be read with his other findings in paragraph 226 that the husband has run Benix for many years without the wife’s interference and in paragraph 227 that he should bear in mind the husband has had to maintain himself and his new family over the extended period of time since the separation.  He contended it is right for the judge to deduct the bank loan from the liabilities of Benix and not to make a corresponding increase in the husband’s assets in deducting the director’s loan owed to him.

16. We are in agreement with Ms Yip’s submission that to deduct the bank loan from the liabilities of Benix would be inconsistent with the judge’s earlier finding that the wife should not have to bear half of the liabilities for the bank loan.  We do not read paragraphs 226 and 227 as detracting from his specific finding in paragraph 225.  As for the allowance made for the sums required to maintain the husband and his new family during the extended period since the separation, the parties had separated in September 2004 whereas the bank loan was taken out in July 2009.  And as found by the judge in paragraph 221, the reason for the bank loan was never made clear during the course of the husband’s evidence.  We also agree with Ms Yip that having deducted $5 million from the liabilities of Benix, a corresponding increase of the same amount should be made in the husband’s personal assets.  This is simply an arithmetic step and does not involve any exercise of discretion.

17. We therefore allow the wife’s appeal.  The financial implications, subject to consideration of the matters raised in the husband’s cross appeal, would be as follows.

18. The value of Benix would be $17 million instead of $14 million.  Each party would receive $1.5 million more (half of $3 million) in equalisation money.  The wife’s assets would be increased to $121,448,690.  The husband’s assets would be increased by $1.5 million and $5 million to $78,101,626.  To achieve equal division of assets, the wife would have to pay the husband $21,673,532.  After transferring her 50% shares in Benix worth $8.5 million, the equalisation money the wife should pay the husband would be $13,173,532, rounded down to $13, 170,000.

The husband’s cross appeal

19. The husband’s cross appeal is far wider in scope.  We will first deal with the shorter points taken by Mr Lo.

20. Mr Lo contended that the costs obtained by the wife against the husband in HCCW 150 of 2006 should be brought into account for equal division, as a result the wife’s assets should be increased by an amount of $762,500, being the net amount of the taxed costs owed to her in the said proceedings, and the husband’s assets should be reduced by a corresponding amount.

21. HCCW 150 of 2006 was a petition brought by the wife as a shareholder of McGill Trading Company Limited (“McGill”) to wind up the company on the just and equitable ground.  The husband is the other substantial shareholder of McGill.  The petition was presented in March 2006, a few months before the husband brought the divorce proceedings against the wife, and the winding-up order was made on 25 April 2007, well before the hearing of the proceedings for ancillary relief in April 2010.

22. Although the issue of costs in the winding-up proceedings was not referred to in the body of the Judgment, on the first page of the Judgment, the submission of final documents regarding the taxation of costs in the winding-up proceedings was mentioned.  In paragraph 8 of the Ruling, the judge said “it is implicit in the judgment that [he] was at all times aware of this cost issue.”  He went on to say that he did not take it into account because he did not think it appropriate to do so, as he was of the view that “if the wife, in discrete litigation, had obtained an order for costs against the husband then it was for her to enforce that order in a manner that was independent of the ancillary relief proceedings”.

23. There is no basis at all to interfere with this exercise of discretion by the judge.

24. Next, Mr Lo argued that the judge had omitted to order the wife to transfer all her interest in Ngai Shing to the husband, and that was inconsistent with the judge’s statement in paragraph 6 of the Judgment that it is manifest in the parties’ “joint best interests that there be a clean break, enabling each to continue their lives independently of each other.”  He submitted the position was no different from the case of Benix in which the judge ordered the wife to transfer her 50% shareholding to the husband.

25. Unlike Benix, the husband held 84% of the shares in Ngai Shing, the wife only 6% with the balance of 10% held by their son-in-law, Martin Cheung.  The wife was not a director and had no active role in its business of trading in light machinery.  According to the husband’s evidence, the business occupies just one floor of a building in Shanghai Street and employs three workers who assist the husband.  The accounts show it is not making money.  Ngai Shing pays the husband $20,000 a month and he has given no value whatsoever to the business.

26. In paragraph 10 of the Ruling, the judge said he was unable to find anything in the Judgment which indicates that he put his mind specifically to the transfer of the wife’s shares in Ngai Shing.  He continued to say that “in complex ancillary relief proceedings such as the proceedings in this matter, not every issue must necessarily be disposed of in absolute terms.  It is not uncommon for a husband and a wife, even after divorce, to retain a common interest in commercial enterprises.”

27. Ms Yip submitted that the wife’s minority interest in Ngai Shing was a matter of little moment to her.  The husband had operated its business for years without reference to the wife, with no objection from her.  We are inclined to agree that the transfer of the wife’s interest in this company would have no practical effect to the parties and there is no sufficient basis to vary the Judgment.

28. Mr Lo complained that in carrying out the equalising exercise, the judge should have required the wife to transfer to the husband one of the real properties that generates rental income, so as to maintain “equilibrium” between the parties and both could enjoy any rise in property value post-judgment.

29. This is again a challenge of the exercise of discretion by the judge.  An equal division of assets does not entail a division of an equal amount in the value of real properties.  It is entirely within the discretion of the judge how best to achieve an equal division of assets.  On the established principles, there is no ground to interfere with this exercise of discretion.

30. This leaves the main challenge of the husband, which relates to the finding that he has undisclosed business assets of $25 million.

31. The judge was satisfied on the evidence that the husband “did not give truthful evidence concerning his assets generally and in particular his Mainland business interests”.  He made specific findings against the husband in these terms:

“184. The difficulty I face, however, is that, while I am sure that the husband has not entirely abandoned his Mainland business interests and while I am sure that he continues to receive an income in respect of them, it is impossible to know how much he is receiving and the process by which he is receiving it. … I am satisfied … contrary to what the husband has asserted, he has not simply handed over the reins to his son-in-law … In some way, I am sure that the husband has received, probably still receives, and most certainly will in the future receive an income from his Mainland business interests.

…

187.  I have also taken into account that the husband appears to be in receipt of a healthy income each month. I have my doubts that all of this comes from capital.”

32. It is pertinent to bear in mind that the findings were made against the background of the husband’s failure to make full and frank disclosure.  The judge then summed up the position in these words:

“189. In the result regrettably, the husband threw up such an impenetrable barrier of confused and meandering evidence that I have been unable to assess on any clear and rational basis the value of his income from Mainland business interests.

190. As I have said in respect of the wife’s failure to make full and frank disclosure, I am therefore left in the position where I must simply do the best that I can.

191. In F v F (Divorce: Insolvency: Annulment of Bankruptcy Order) [1994] 1 FLR 359 at 367, Thorpe J (as he then was) found himself in a similar dilemma and commented in respect of the husband –

  “… if he has conducted these proceedings in a vain endeavour to maintain that  camouflage, if in consequence the obscurity of my final vision results in an order that is unfair to him it is better that than that I should be drawn into making an order that is unfair to the wife. If at the end of this case he feels that the lump sum that I order is unfair … then he should remember that he has brought that consequence upon himself …”

192. My present dilemma constitutes a classic example of why it is in the interests of both parties to this type of litigation to make full and frank disclosure. …

193. The sum of these failures, of course, meant that the husband was put defenceless into the witness box and now must submit to this Court drawing inferences that, if they are inaccurate, are based on the very inaccuracies and indeed subterfuges which the husband put before it.

194.  That being noted, as I said in respect of the wife, the need to draw robust inferences does not give me carte blanche. I must attempt to do so, insofar as that is possible, within the context of the evidence that I have heard and have been prepared to give some weight.”

33. The judge then spelled out the matters he was prepared to take into account in the husband’s favour in paragraph 196 of the Judgment:

“While, on the consideration of all the evidence, I have been prepared to accept the husband’s Mainland business interests have been, and no doubt continue to be, substantial, I have been persuaded that, no doubt in large measure, the husband has over the past years ceded a large interest in the businesses to his son-in-law and his godson. In this regard, I take into account that his close relationship with his son-in-law has no doubt prompted a degree of benevolence on his part. … I have also taken into account that the husband is now into his 80s, a man of advanced years and no doubt, to a material degree, provided he is able to maintain his lifestyle, a man who is prepared to let those close to him do most of the work and, in the result, take the lion’s share of the profits.”

34. Having set out his thought process, the judge then arrived at the conclusion in paragraph 197 that it would be appropriate to give a value of $25 million to the husband’s business interests generally, in the Mainland and Hong Kong, other than those interests to which specific reference was made elsewhere in the Judgment.

35. We have set out the relevant parts of the Judgment at some length because it is important to have regard to those parts in their proper context following the flow of the judge’s reasoning, instead of reading selective parts of the Judgment in a somewhat disjointed manner, as Mr Lo has invited us to do.

36. Mr Lo sought to argue there was no basis for the finding of undisclosed business interest in the value of $25 million, submitting as follows:

  (1)  The judge gave a value of only $1.5 million for 20 pieces of diamond jewellery which the wife disclosed she had only in cross-examination.  He declined to draw more costly inferences against the wife by adding a further $10 million to her side of the ledger (paragraphs 135 and 136 of the Judgment).  He did not apply the principle of drawing adverse inferences fairly to the husband for his non-disclosure of assets.

  (2)  The business of Ngai Shing had suffered a decline due to the loss of old customers to the Pearl River delta and its business had not been profitable for the last decade or so.

  (3)  The forensic accountant engaged by the wife merely testified he had found “strong indications that something might be hidden in China” but his report was “not … conclusive”.  The report could do little more than “identified certain movements of moneys and certain unusual corporate procedures” (paragraphs 153 and 154 of the Judgment).  From a finding of “lazy” but “permissible” bookkeeping and “an unusual accounting system which allowed profits made in the Mainland to be “channelled off” ”, it was wrong to jump to the conclusion that there must have been activities to hide assets.

  (4)  In respect of Shenzhen Sum Ngai Shing Industrial Company Limited (“Sum Ngai Shing”), the husband was not a shareholder and he asserted that he had no interest in it.  Sum Ngai Shing had ceased operation in about 2005 on the wife’s case (paragraph 174 of the judgment).

  (5)  For Shenzhen Zhong Yi Cheng Pneumatic Machinery Company Limited (“Shenzhen Zhong Yi Cheng”), the husband had disclosed long ago he had no beneficial interest in it.  He had produced at trial a joint venture agreement between Sum Ngai Shing and Ngai Shing showing that it was agreed the former would provide the whole of the capital for Shenzhen Zhong Yi Cheng. Further, Shenzhen Zhong Yi Cheng had ceased operation in about 2007 on the wife’s case and in any event the judge was prepared to accept this entity is “no longer in operation” (paragraphs 174 and 183 of the Judgment).

  (6)  Ngai Shing Unihope Trading (Shenzhen) Company Limited (“Ngai Shing Unihope”) is owned by a Hong Kong entity of which the husband’s son-in-law holds one-third of the issued shares.  The judge had read too much into the Chinese characters “Ngai Shing” used in the name of this new company.

  (7)  The judge had accepted that the husband had allowed his son-in-law to “take the lion’s share of the profits” (paragraph 196 of the Judgment).  It is improbable that the husband would hide assets with his godson who was made bankrupt.

  (8)  The wife could have subpoenaed her son-in-law and her godson to give evidence, just as she had issued subpoenas to various banks.

  (9)  It is mere speculation to draw adverse inference based on the affluent lifestyle of the husband.

37. In our judgment, none of the arguments advanced hold good.  The judge had a sound basis for drawing the adverse inferences against the husband in the absence of full and frank disclosure of his assets, having considered the scale of the business activities on the available evidence, the documentary records of the business entities in the Mainland, the lifestyle of the husband and his evaluation of the husband’s oral testimony.  The quantification he reached was reasonable and, we would say, entirely fair, in view of what he was prepared to take into account in the husband’s favour.

38. There is no unfairness in the manner the judge drew adverse inferences against the husband, compared to his treatment of the wife.  As pointed out by Ms Yip, the nature of non-disclosure was different, the extent of the adverse inferences that should properly be drawn must differ where the context was different.

39. The other submissions also relate to factual matters of which the judge had made a thorough analysis.  We see no basis at all to interfere with his factual findings and inferences.

40. In the respondent’s notice, it was contended that the value of $25 million which the judge assessed as the undisclosed business interest should be reduced to $1 million.  Mr Lo did not develop this argument or referred to it in his written and oral submissions.  It would suffice to say there is no merit in this argument.

41. We therefore dismiss the husband’s cross appeal.

Orders

42. We make the order sought in the amended notice of appeal that the wife shall pay a lump sum of $13,170,000 to the husband within 6 months from the date of our judgment.

43. Costs should follow the event.  We order the husband to pay the wife’s costs of the appeal and cross appeal, as well as the costs of the hearing on 3 October 2011 which were reserved by the judge.