Divorce Proceedings and Your Business

Parties to divorce proceedings owe an ongoing duty to the Court to give full and frank financial disclosure.

If you are the sole proprietor or a substantial shareholder of your private company, will the company’s assets be treated as your assets? Will you have to disclose the company’s assets? How will such  disclosures affect your business? If you are a director of the company, how can you maintain the
confidentiality in the company’s documents while fulfilling your disclosure obligations?

These articles explore your financial disclosure obligations and fulfilling your duties (as a shareholder and/or as a director) in the context of divorce proceedings.

Your Disclosure Obligations

Parties in divorce proceedings are often baffled by the length and extent of details required by the Financial Statement (commonly referred to as the Form E). Such disclosures are extensive. They include your bank accounts; any corporate interest (i.e. shareholding); insurance policies; monies owned to you; personal valuables; pensions, etc. In summary, any asset that you are beneficially interested in, whether such assets are held in your sole name, the parties’ names, or under the names of others on your or on both parties’ behalf, regardless of whether these assets are situated in Hong Kong or not, physical or virtual.

In particular, Part 2.4 and 2.6 of the Form E require parties to set out their interests in private companies and attach the last 2 years of audited / unaudited financial statements ‘and any other documents on which you base your valuation’. This is only a starting point and further corporate financial documents or information may be requested by the other party. Such requests for further disclosure are usually made by way of Questionnaires and Answers following filing of the parties’ Forms E.

These further requests for corporate financial documents may include: profit and loss statements, balance sheets, cash flow statements, corporate bank statements or even invoices and receipts.

Red Flags For Other Stakeholders

In our experience, request for corporate financial document will usually raise red flags for other shareholders, board members or stakeholders. Corporate financial documents may contain commercial confidential information, showing the company’s internal financial arrangements or even dealings with its business partners. Understandably, stakeholders will be concerned about outsiders obtaining such sensitive information. What can you tell the stakeholders about your spouse’s confidentiality obligations in divorce proceedings?

Confidentiality Obligations

As a starting point, divorce proceedings are private and confidential in nature. Hearings in matrimonial cases are generally not open to public. (Practice Direction 25.1) Furthermore, rule 121 of the Matrimonial Causes Rules (Cap. 179A) provides that “no document filed or lodged in the registry, other
than a decree or order made in open court, shall be open to inspection by the public without leave of the court…”

The above protection is reinforced by a prohibition (called the “implied undertaking”) against the parties’ use of documents or information disclosed within divorce proceedings for any collateral or ulterior purposes (ie purposes beyond proper conduct of the divorce proceedings) without prior permission of the Court. Notably, such prohibition in ancillary relief proceedings also covers documents and information voluntarily disclosed by a party as part of its duty of full and frank disclosure. (Clibbery v Allan [2002] Fam 261) Failure to maintain confidentiality may be restrained by injunction or punished as contempt of Court.

For example, use of documents disclosed in divorce proceedings to report the other party’s wrongdoings to the police, or to pursue satellite litigation against the other party, would likely infringe the above rule 121 and the implied undertaking.

What if My Spouse ‘Found’ these documents at our Home?

During a relationship, spouses commonly bring work home or keep copies of confidential corporate documents at home. Spouses may also share computers, data storage or passwords. With the breakdown of communication and trust, parties are often tempted to gather private and confidential
information about each other’s finances, to advance their own case and to prevent destruction or concealment of such information. Such conduct, known as “self-help”, is actually prohibited under the law.

In the landmark UK decision of Imerman v Tchenguiz [2010] 2 FLR 814, the wife’s brother, who shared an office and a computer system with the husband, downloaded a substantial number of documents from the husband’s computer and passed them to the wife. In that case, the English Court of Appeal set down clear principles regarding documents obtained through self-help.

It is a breach of confidence for a person (“A”) to intentionally obtain, examine, or copy another person’s (“B”) information secretly and without authorization, knowing that B reasonably expected it to be private; or to supply to another person with such information without authority.

B who has established a right to confidence in the information and the document is entitled to an injunction to restrain A to look at, copy, distribute any copies of, or communicate or utilise such information and to enforce the return or destruction of such document.

Despite the marriage, each spouse is entitled to a life separate and distinct from the shared matrimonial life. On this basis, an action for breach of confidence can be brought by one spouse against the other.

Once the confidential quality in the document is established, the nature of the parties’ relationship (spouses, civil partners or otherwise) has no relevance to the remedy for breach of that confidentiality. Once the Court determines that the A has obtained confidential information without authorization from B, the appropriate remedies are that A is to return the documents to B and restraining A and A’s solicitors from using any such information obtained from those documents.

The delivered-up documents are to be kept by B’s solicitor for consideration whether the documents contain any information which ought to be disclosed to A in the proceedings in compliance with B’s full and frank disclosure obligations.

The above Imerman principles are now widely applied by the Hong Kong Courts and injunctions have been issued restraining the use of confidential documents obtained without the other party’s prior authorization.

In the context of corporate financial documents, confidential documents will include all documents connected with the company’s business dealings, such as bank statements, correspondence relating to business dealings, or any documents prepared for the purposes of the business.

What Happens if My Spouse Refuses to Return Such Documents?

If your spouse has obtained confidential documents belonging to you, you are entitled to demand that: (1) such documents be returned to you; (2) your spouse makes no copy of such documents; and (3) any copies already made by your spouse should be destroyed.

If your spouse refuses to return these confidential documents to you, you may obtain an Order restraining your spouse from using and for return of such documents to you. A Penal Notice is usually endorsed on the injunction, stating that your spouse ‘may be held to be in contempt of Court and
imprisoned or fined or made subject to other punishment’ if the terms of the Order is not complied with.

In summary, the case of Imerman sets down principles protecting a spouses’ right to privacy and confidentiality even as between spouses. If a spouse obtains confidential documents without the other spouse’s prior authorisation, such documents must be returned, no copy must be made and any information obtained from such documents must not be used. However, where such documents are relevant to divorce proceedings, they would still have to be disclosed by its owner within the protected environment of divorce proceedings as part of a spouse’s duty of full and frank disclosure.

Concluding Remarks

While encouraging spouses to give full and frank disclosure, the law firmly protects confidentiality and privacy of any documents and information disclosed in divorce proceedings. Such protection comes with robust remedies. You may consider explaining your disclosure obligations and the confidential nature of divorce proceedings to other stakeholders to allay their concerns.

Once it has come to your knowledge that your spouse has obtained your confidential information without your authorization, you should seek legal advice and act as soon as practicable to contain and minimize any risk of further disclosures, as well as to enforce return of any documents obtained. In
the next article, we will explore the extent of disclosures that can be sought in the divorce proceedings and share with you some past examples how parties have sought to limit the extent of information showing on the document when the document is properly disclosed.

In our previous article, we explored the confidential nature of divorce proceedings; the legal framework of protection of confidentiality over documents and information disclosed in divorce proceedings; and remedies available from the Court if you discovered that your spouse has obtained
your confidential information without your consent.

In this article, we shall continue to explore the financial disclosure mechanism in divorce proceedings, the extent of financial disclosure you will be required to make regarding your business; and concluding with a few past examples of parties attempting to limit the information available on the disclosed

Questionnaires and Answers

The Court has general oversight of the extent of discovery to guard against using discovery applications to fish for information. Requests for disclosure of documents must be relevant to the issue in dispute and must not be oppressive and/or disproportionate. Questionnaires that do not comply with these requirements will not be allowed. On the other hand, the Court has the power to compel a party to give disclosure.

However, this does not mean that a unified standard of disclosure is applied throughout the entire proceeding to ensure proportionality. Where only general disclosures are expected prior to the FDR hearing, more detailed disclosure maybe allowed if no settlement is reached and the matter proceeds
to trial.

How then do you deal with requests to disclose your company’s corporate documents?

Obligations of a shareholder

Legal practitioners under the Common Law will be familiar with Salomon v Salomon & Co. Ltd. [1897]  AC 22, which firmly establishes that a company is a legal person of its own right, having a separate and distinct identity from its shareholders. Although a shareholder has a right to share in the profits of the
company, he / she has no right in the assets in the company’s name, which belong to the company. This principle applies regardless of whether the company is owned by a sole shareholder or a number of shareholders.

In this context, a shareholder has to disclose in divorce proceedings what is provided by the company in its capacity as a shareholder. This may assist in an expert’s valuation of the shares.

The above does not apply where a company is wholly controlled by you. In that case, you may be required to disclose all relevant documents in the company’s possession. (B v B (divorce proceedings: discovery) [1979] 1 ALL ER 801)

Where there are financial dealings between you and a private company that you are interested in (most typically loans made between yourself and the company), you may also be required to explain and provide evidence of such dealings.

Obligations of a director

The Form E itself only requires you to disclose the directorships that you have held in the last 24 months. Given that directors have no entitlement over the company’s assets, your disclosure may be limited to information and documents relating to director’s remuneration. Where there are financial
dealings between you and the company (such as a director’s loan), you may be required to explain and provide evidence of such dealings.

Obligations of a director who is also a shareholder

A director will usually have access to corporate financial documents which are not available to shareholders, such as profit and loss statements, balance sheets, cash flow statements, corporate bank statements or even invoices and receipts. These documents maybe highly relevant in litigation as to the valuation of the company, and thus the value of your shareholding in the company.

Although these documents belong to the company, the general rule ‘is that a party to a suit must disclose all the documents in his possession, custody or power which are relevant to the matters in issue. The Court has a discretion whether or not to order him to make such disclosure, and also has a
discretion whether or not to order him to produce the documents for inspection by the other party or the Court’ [emphasis added]. (B v B, above) These documents can be categorised into those that are: (i) in actual possession / custody of the party who is a director of the company; and (ii) within the director’s power to obtain from the company.

Documents in Actual Possession / Custody of a Director – If there are relevant documents of the company that are within your physical possession, you must disclose them upon request by the other party, even though you may be holding them as a servant, agent, or officer of the company.

Documents in the Power of a Director to obtain from the company – Whether these documents are in the power of a director will depend on the facts of each case. In his context, ‘power’ means ‘the enforceable right to inspect or obtain possession or control of the documents’. (B v B, above)

 The Judicial Discretion

Having said the above, it does not mean that the Court will always order disclosure of documents in the custody, possession and power of the director beyond what is required in the Form E. Ordering disclosure is within the discretion of the Court. In exercising its discretion, the Court will have to regard to all the circumstances of the case. ‘The court will balance the relevance and importance of the documents and the hardship likely to be caused to the [applicant] by non-production against any prejudice to the [respondent] and third parties likely to be caused by production’. (B v B, above)
Generally speaking, the Court is unlikely to order disclosure beyond financial statements unless 1) further documents or information are necessary for valuation, or 2) there is evidence indicating that the financial statements are unreliable (such as evidence of accounting irregularities or unusual
fluctuation in figures).

More importantly, the Court will not order parties to do which they have no power to do, nor make an order for production unless it is satisfied that production is necessary either for disposing fairly of the issues between the parties or for saving costs. In a corporate setting, the board of directors may
have legitimate reasons for opposing production of sensitive corporate documents. If this is the case, provided that the Court is satisfied that the objection is not contrived for the purpose of frustrating  the powers of the Court, the Court will not compel the director to disclose the documents sought.

I am Obliged to Disclose, What’s Next?

Even when a party is under an obligation to disclose, that party may still seek to limit the scope of disclosure, the form of disclosure, or the persons having access to the documents. In the past, where information involved requires to be kept in utmost confidence (e.g. trade secrets), parties have successfully sought to limit disclosure to the parties’ representatives and accountants (as opposed to the party seeking the disclosure) and on a need-to-know basis. In those circumstances, the Court will be the final decision-maker as to ‘who gets to see what’ to strike a balance between maintaining confidentiality and avoiding prejudice to the other party’s ability to advance his case.

In other circumstances where document sought might be voluminous (in one case, requesting a few years of the company’s trade records), parties may wish to consider inspecting the documents prior to requesting production of copies.

Concluding Remarks

A party’s obligation to give full and frank financial disclosure is first and paramount in any divorce proceedings. Failure to comply could potentially attract serious legal consequences.

Even when a party is able to disclose information or documents, the Court may still refuse to exercise its discretion to order disclosure, if such disclosure is unnecessary, disproportionate or may cause undue hardship to the disclosing party. Even if a disclosure order is made, the disclosing party may still invite the Court to impose conditions of disclosure.

Needless to say, each case will turn on its own facts and each concern will require its own tailor-made solution.

Authors: Adrian Au and Sam Ng

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