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War and Peace

Ashley and Wen Shan discuss the preservation and division of assets in divorce proceedings.

This article was first published in Issue 2/2018 of Legal Insights, a Skrine Newsletter. Reproduced with permission of Skrine.

 

The contract of marriage which binds two people together is a joyous occasion warranting the celebration of the community. Unfortunately, the tides of time change circumstances and in some cases, people decide that it is best to go their separate ways. The process of legal separation or divorce will almost always involve the disentanglement of matrimonial assets, which are assets acquired during the marriage by the spouses.

 

On occasions, the legal process of disentangling matrimonial assets becomes a war between the couple, particularly where a substantial amount of assets is at stake. In this article, we explore the process of laying claim to the assets, looking first at the arsenal of legal rights available to protect the assets, and secondly, at the legal limits in claiming the matrimonial assets between the couple.

 

Matrimonial assets play a central role in two periods of the separation proceedings. The first is in the opening act, and the second, in the closing stages of the proceedings. In this article, the party initiating the divorce will be referred to as the applicant, and the other, as the respondent.

 

THE FREEZING INJUNCTION – THE NUCLEAR WEAPON

 

The BBC reported that nearly a quarter of divorcees in the UK have tried to hide financial assets “to keep them secure” (Divorcing Couples Often Hide Assets, Survey Suggests; bbc.com, 22 February 2013). This typically involves diverting salaries from a joint account, to utilising special purpose companies with offshore bank accounts.

 

To prevent the dissipation of assets, the law provides for freezing injunctions over matrimonial assets to prevent a party from disposing of the marital assets during the separation proceedings. In Malaysia, section 102 of the Law Reform (Marriage and Divorce) Act 1976 (“LRA”) allows for the issue of freezing injunctions in matrimonial proceedings. It applies the same principles as a commercial freezing (also known as a Mareva) injunction (Sheng Lien @ Sheng Len Yee v Tan Teng Heng & Anor [2010] 1 LNS 1480).

 

In a classic ambush tactic, and to prevent the respondent from hiding or disposing the assets, the applicant would usually apply for the injunction on an ex parte basis (meaning that the applicant will seek the relief without the respondent’s knowledge or attendance at the hearing) and serve the injunction order alongside the cause papers for a divorce. Consequently, the first occasion the respondent will find out about the freezing order is when the divorce papers are served, which is after the assets have been frozen.

 

The freezing injunction is seen as a first strike nuclear weapon, signalling an aggressive, unapologetic, vengeful and bitter start to a divorce. It begins a war because the respondent normally sees it as a fight for money and property with the implied undertone that the applicant has not an ounce of trust in the respondent’s honour and integrity.

 

The freezing injunction has very far reaching consequences; it can freeze all the respondent’s assets, including bank accounts of a company in respect of which the respondent is a director or has control over. The Court may even extend it to a group of companies under the control of the respondent.

 

LIMITING THE NUCLEAR FALLOUT

 

While a freezing injunction initially feels overwhelming, not all is lost – the respondent can clawback lost territory by relying on the safeguards developed under the common law to protect against abusive tactics by either or both parties and overreaching reliefs granted by the Court.

 

1. The 50% Limit

 

Firstly, the injunction should only be limited to the maximum value of the marital assets that the applicant would be entitled to receive at the conclusion of the divorce or separation.

 

In Ghoth v Ghoth [1992] 2 All ER 920, the Court of Appeal of England held that it would not in any foreseeable circumstance grant a freezing injunction over all the assets of the other party. In matrimonial proceedings, a freezing injunction should be limited to the amount which realistically, considering everything in the applicant’s favour, would be the maximum amount which could possibly be achieved at the conclusion of the divorce. In Malaysia, the High Court in Susila S Sankaran v Subramaniam P Govindasamy [2013] 4 CLJ 579, held that the maximum the applicant could claim is 50% of the matrimonial assets.

 

2. Movement of Assets Must Defeat the Applicant’s Claim

 

In determining whether the movement or potential movement of assets is designed to defeat an applicant’s claim, the Malaysian Court has taken into account the adequacy of matrimonial assets remaining to satisfy the likely proportion a Court will order in favour of the applicant.

 

In Susila S Sankaran, it was held that the respondent’s disposal of assets had not reached the point where the applicant’s claim to the marital assets would be defeated. In that case, the applicant could claim at most, 50% of the matrimonial assets and the respondent had not disposed of the property to the extent that his ability to meet his obligation for spousal maintenance was compromised, or that he had deprived the applicant from effectively obtaining 50% of the matrimonial assets.

 

In another example where the assets are internationally located, in Lee Chi Lena v Chien Chuen Chi Jeffrey (Qian Jie, co-defendant) [2011] SGHC 91, the Singapore High Court upheld the dismissal of the wife’s application for an injunction to restrain the husband from dealing with a piece of immovable property in Shanghai. The Singapore High Court held that apart from the Shanghai property, there were adequate matrimonial assets available to satisfy a likely division proportion in favour of the wife.

 

3. Evidence of Risk of Dissipation Required

 

Establishing the risk of dissipation requires proof of an intention to dissipate. The intention in this context means a deliberate or reckless dealing with the asset (UL v BK (Freezing Orders: Principles and Safeguards) [2013] EWHC 1735). There needs to be solid evidence of an unjustified dealing with the assets by the respondent to avoid the possibility of a judgment, or that the respondent is disposing the assets in a manner clearly distinct from his/her usual or ordinary course of business. In UL v BK, the English High Court observed that mere expressions of anxiety and suspicions do not meet the threshold.

 

For internationally invested couples, moving assets in offshore structures will not of itself amount to unjustified conduct. The English High Court in Wade v Wade [2003] EWHC 773 held that the fact that the respondent had placed his shares in offshore trusts did not give rise to a suspicion as there was no evidence in this case to suggest that he had ever failed to pay a debt due.

 

4. No Detriment to Business Dealings or Standard of Living

 

The Malaysian Court of Appeal in Malaysia Discounts Bhd & Ors v Pesaka Astana (M) Sdn Bhd & Ors [2008] 5 MLJ 1 (applying the English Court of Appeal decision in Polly Peck International Plc v Asil Nadir & Ors [1992] Lloyd’s Rep 238) held that one of the relevant established judicial principles relating to the nature of a freezing injunction is that the defendant “cannot be required to reduce his ordinary standard of living nor be prevented from carrying on his business in the ordinary way, meeting his debts or other obligation as they become due”.

 

The concept of payment or other asset-dealing falling within the “ordinary and proper course of business” was discussed by the English Court of Appeal in Michael Wilson Partners Ltd v John Foster Emmott [2015] EWCA Civ 1028. Whether a payment is made in the “proper course of business” is likely to depend on the purpose of the payment. If the payment is made in order to discharge a pre-existing liability of the business made in good faith, it would be difficult to see how that would not be in the “proper course of business”.

 

As regards the second requirement, i.e. whether a payment is made “in the ordinary course of business”, the Court in Michael Wilson Partners observed that it is not the payment, but the course of business that must be “ordinary”. It is possible that similar tests will be applied in relation to a freezing injunction under section 102 of the LRA.

 

Lifting the Injunction

 

As mentioned earlier, it is not unusual for the Court to grant an ex parte order to freeze all assets under the control of the respondent in order to prevent a dissipation of assets.

 

At the inter-partes injunction hearing, both parties are present to submit their positions on the merits of the injunction. The respondent may be able to set aside the injunction by establishing the absence of risk of dissipation. However, where the applicant successfully establishes a risk of dissipation, the respondent could nevertheless seek to vary the injunction in accordance with the 50% rule.

 

THE ASSET DIVISION – THE FINAL BATTLE

 

In this section, we consider the next point at which assets are battled over once and for all – the division of assets. Skipping forward to the conclusion of the separation, the next point in which the marital assets are in contention is in deciding how to divide the marital assets.

 

Under the existing law, it is essential for a Malaysian Court to determine whether the marital asset was acquired by the joint effort of both spouses, and if so, to lean towards equality of division, or whether the said asset was acquired through the sole effort of one spouse, in which case a greater proportion will be awarded to the party who put in a greater amount of effort to acquire the asset.

 

In cases where the asset was acquired by the sole effort of one spouse, the Malaysian Courts have awarded 25% to 35% to the non-acquirer for his/her non-financial contributions, i.e. contributions to the welfare of the family by looking after the home or caring for the family (Lim Bee Cheng v Christopher Lee Joo Peng [1997] 4 MLJ 35; Joint Petition of Heng Peng Hoo & Goh Ah Moy [1989] 1 CLJ (Rep) 639; Ching Seng Woah @ Cheng Song Huat v Lim Shook Lin (F) [1997] 1 CLJ 375; Retnam Suppan v Kamala Ponnampalam [2009] 1 LNS 1442; Lee Yu Lan v Lim Thain Chye [1984] 1 MLJ 56; Baheerathy Arumugam v Gunaselan V. Visvanathan [2013] 1 CLJ 954 and Ng Bee Lee v Liew Kam Cheong [2010] 1 LNS 736).

 

The Law Reform (Marriage and Divorce) (Amendment) Act 2017, which has yet to come into operation, will change this by removing the distinction between jointly acquired assets and solely acquired assets. It provides that all assets that have been acquired by both spouses during the marriage will be subject to division and the Court in considering the division, subject to statutory considerations, will incline towards equality of division.

 

This change in the law towards equality of division recognises that the two halves of the relationship may have played very different roles in the household, presuming that the contribution of both halves were equal yet different.

 

The House of Lords in White v White [2000] UKHL 54 summarised the reason behind the legal recognition of non-financial contributions in respect of claims to matrimonial assets. The discretionary powers conferred by the UK’s Parliament some three decades ago, enable the courts to recognise and respond to developments of this nature. These wide powers enable the English Courts to make financial provision orders in tune with the current perceptions of fairness. Today, there is greater weight attached to the value of non-financial contributions to the welfare of the family. According to Lord Nicholls of Birkenhead:

 

There is greater awareness of the extent to which one spouse’s business success, achieved by much sustained hard work over many years, may have been made possible or enhanced by the family contribution of the other spouse, a contribution which also required much sustained hard work over many years.”

 

There is increased recognition that, by being at home, and having and looking after young children, a wife may lose forever the opportunity to acquire and develop her ability and capacity to earn an independent income.

 

Recently, in AAZ v BBZ, C Ltd and P Ltd [2016] EWHC 3234 (Fam), one of the UK’s largest divorce settlement, the English Family Court awarded the former wife of an oil and gas trader almost half of GBP1 billion of matrimonial assets. The wife was a housewife and mother throughout the marriage whilst the husband worked as an oil and gas trader. In his judgment, Haddon-Cave J said that the couple’s GBP 1 billion worth of marital assets had been built up over the course of the marriage through equal contributions, and should be subject to the sharing principle. According to a family law practitioner in an English law firm, “This big-money divorce settlement represents yet another example of the English Court’s unparalleled generosity towards the financially weaker spouse. This generosity is rooted in the fundamental principle that breadwinners’ and homemakers’ contributions to a marriage are of equal importance(Estranged Wife Gets £453m In One Of Biggest UK Divorce Settlements; theguardian.com, 11 May 2017).

 

THE AFTERMATH

 

In the battle for matrimonial assets, the freezing injunction marks the beginning of an aggressive and bitter war due to its emotional and financial impact on the respondent. Its objective is to protect the applicant’s claim to the matrimonial assets. Though the freezing injunction may seem overwhelming at first glance, the common law has developed a series of safeguards to protect against abusive tactics and overreaching reliefs as aforesaid.

 

The battle then proceeds further during the division of matrimonial assets, where proving a spouse’s contributions during the marriage becomes crucial in establishing his or her claim to the matrimonial assets.

 

While the above analysis of the law sets out the rules of (dis)engagement in a clear and orderly sequence, one should never downplay the realness and reality of a marital breakdown. The lengthy and bitter ending of relationships takes its toll on both parties, draining them psychologically, emotionally and financially. In the aftermath, the winner, if there is one, will emerge emotionally scarred.

About the Authors

 

Ashley Tan graduated with a LLB Bachelor of Laws degree from the London School Economics and Political Science in 2013. She was then called to the Bar of England and Wales in 2014 and returned home to commence pupillage in Skrine. She was admitted as an Advocate and Solicitor of the High Court of Malaya in 2015.

Email: ashley.tan@skrine.com 

 

 

Wen Shan graduated from the University of Leicester in 2012 and was called to the Bar of England and Wales in October 2013. He commenced his pupillage in Skrine and was admitted to practice as an Advocate and Solicitor of the High Court of Malaya in 2015. He practices general litigation, with a focus on insurance and reinsurance disputes.

Email: khoo.wen.shan@skrine.com

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