You are here

Back to top

Insights

Essential Legal Considerations for Family Succession in Hong Kong

December 1, 2017

With the successful launch in June 2017 and since then CPT accredited courses have been conducted for a number of participants who, as well as those prospective attendees, apart from gaining CPT credits are also advised to note outside the classroom the essential legal considerations for family succession, stated and explained below, in their business dealings with clients in Hong Kong.

Tools of Legacy Planning

Trust in the form of deed (signed, sealed and delivered as deed of trust to tackle with the issue of consideration for gifted property from the settlor to the beneficiary or beneficiaries) through the trustee(s) who have the fiduciary duties, inter alia, of not meddling with the trust property. The settlor should have been advised of his or her irrevocable intention in setting up an inter vivos (life-time) trust that the trust property is passed through the trustee(s) to the beneficiary or beneficiaries at the formation of the trust which fulfils the three certainties of intention, subject matter and beneficiaries.

Will in the form of writing will be effective at the death of the testator who still has control of his or her property under the will, in contrast with a life-time trust, before death and also has the liberty to designate a final list of beneficiaries in the last will.

Life insurance in agreement under the common law principles (whereas trust and will are operated under equity) shall be binding on the parties of the policy holder and the insurer for the benefit of the designated beneficiary or beneficiaries. Life insurance does not have the considerations for ‘indemnity’, ‘contribution’ and ‘subrogation’.

Effects of Bankruptcy Order

Upon submission of the petition, a date will be fixed for the hearing of the application. In the event that the Court grants a bankruptcy order to the debtor, the bankruptcy will be effective from the date of the granting of such an order.

Once the bankruptcy order is issued:

  1. The Official Receiver shall be thereby constituted receiver of the property of the bankrupt;
  2. In the event of a creditors’ petitioning, the debtor has to present the creditors with an attested details of assets and liabilities within 21 days of the issuance of the bankruptcy order;
  3. The Official Receiver may require the registration of the debtors’ fixed assets as appearing in the Land Registry;
  4. The relevant bankruptcy order will be published in the gazette and local newspapers.

On the making of a bankruptcy order the Official Receiver shall be the receiver of the property of the bankrupt, and thereafter, except as directed by the bankruptcy order, no creditor to whom the bankrupt is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the bankrupt in respect of the debt, nor shall proceed with or commence any action or other legal proceedings, unless with the permission of the Court.

This restriction does not apply to:

  1. The debtor (the bankrupt) demanding payment from his other debtors;
  2. Legal actions undertaken by those creditors who have a proper legal charge created over the assets of the debtor (section 64);
  3. Unproved debts;
  4. In accordance with Part III of the Landlord and Tenant (Consolidation) Ordinance, a landlord may retain the assets of the bankrupt for unpaid rent due by the debtor, however, in case the retention is only made after the issuance of the bankruptcy order, the amount retained should not be more than 6 months of the rental amount before the issuance of the bankruptcy order (section 40); or
  5. Other situations as permitted by the Court (section 12(1)).

Appropriate action has to be made if and when a life insurance policy holder is faced with an imminent bankruptcy petition under the Bankruptcy Ordinance.

Life policies belonging to the bankrupt at the commencement of the bankruptcy will vest in the Trustee in Bankruptcy. These are, of course, not including a life policy owned by someone else and insured on the life of the bankrupt person.

The trustee may by notice in writing claim for the bankrupt’s estate any property which has been acquired by, or has devolved upon, the bankrupt since the commencement of the bankruptcy (section 43A).

Bankruptcy Petition

  • For Creditor’s and Debtor’s Petition, procedures can be invoked with amount of debt of HK$10,000 or more.
  • Debtor needs to list out all assets including life policies in the statement of affairs, before bankruptcy order is granted.

Married Persons Status Ordinance, Cap. 182

Section 13

  1. This section applies to a policy of assurance or endowment expressed to be for the benefit of, or by its express terms purporting to confer a benefit upon, the wife, husband or child of the insured.
  2. The policy shall create a trust in favour of the objects therein named.
  3. The moneys payable under the policy shall not, so long as any part of the trust remains unperformed, form part of the estate of the insured or be subject to his or her debts.

……

As regards the effect of a bankruptcy petition to the life insurance policy holder and/or the objects (beneficiaries) named in a policy of assurance or endowment expressed to be for the benefit of, or by its express terms purporting to confer a benefit upon, the wife, husband or child of the insured pursuant to section 13 of the Married Persons Status Ordinance that the policy shall create a trust in favour of the objects therein named, appropriate measures have to be taken well in advance before any bankruptcy petition is filed against such ‘family’ beneficiaries.

Legal principles applicable to assets upon divorce

In ancillary relief proceedings the court is required to undertake an inquiry into all of the circumstances of the case, having regard to the factors set out in section 7 Matrimonial Proceedings and Property Ordinance, Cap 192.

The Court of Final Appeal in LKW v DD (2010) HKCFAR 537, [2010] 6 HKC 528 established that the inquiry is undertaken having regard to the “underpinning White principles” in White v White [2001] 1 AC 596 namely the object of fairness; the rejection of discrimination; the yardstick of equal division; and the rejection of minute retrospective investigation.

Applying those principles as the foundation for the inquiry, the inquiry is a five stage process.

The court must ascertain the financial resources of each of the parties.

The court will assess the parties’ financial needs, generously interpreted.

If surplus assets remain after the parties needs have been catered for, the court will apply the sharing principle. Unless there is good reason, capable of enunciation, for departing from equal sharing, the total assets should be divided equally between the parties.

The consideration of whether there are good reasons for departing from equal sharing.

The fifth and final stage is the application of the various conclusions reached through the process, and the decision as to the division of property between the husband and wife.

In carrying out the fourth stage of the inquiry, the Court of Final Appeal has identified six particular factors that might be relevant to the issue of departing from equal sharing. They are: the source of assets; conduct; the financial needs of the party seeking relief; the duration of the marriage; the contributions made by each of the parties to the welfare of the family; and the matter of compensation.

By Rule 3 Matrimonial Causes Rules, the Rules of the High Court apply to matrimonial proceedings:

“Subject to the provisions of these rules and of any enactment, the Rules of the High Court (Cap. 4 sub. leg.) shall apply with the necessary modifications to the commencement of matrimonial proceedings in, and to the practice and procedure in matrimonial proceedings pending in the Court of First Instance or in the District Court.”

The Court of Final Appeal in FAMV Nos. 38 & 39 of 2014 upheld on the whole the decisions of the Court of Appeal in applying the above legal principles, with particular regard to the following question:

“In circumstances where the Court has found that both Husband [LKKS] and Wife [TCWF] contributed equally to the running of a business – a business that was started with seed corn capital from a third party relative but the value of which far outstripped the value of the initial gift by the date of separation – are the spouses entitled to share equally in the business assets (and, in any event, in the value of the growth of the business assets during the marriage)?”

This question would only arise if Wife succeeded in reversing the Court of Appeal’s judgment which confines her to the needs award assessed by Saunders J (the judge granting relief to the wife); in effect, the net award to Wife was dropped from HK$1,410.4 million to HK$445.5 million on completion of appeal proceedings.

We look forward to interacting, exchanging and learning more from active participation of CPT accredited courses, many ready for conduction in the pipeline.

Parry Tam
Consultant, Law and Training

You may also be interested in