10 March 2020

Coronavirus: the effect of an economic downturn on divorce settlements in Hong Kong


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As if 2019 had not been tough enough for the Hong Kong economy, now Hong Kongers are challenged once again, this time by the effects of the COVID-19 virus. With its proximity to China, the epicenter of the outbreak, international business and travel have been severely curtailed. Shops, cafes and restaurants, for which Hong Kong is rightly renowned for, are empty and the tourist industry, already suffering from the effects of the protests in 2019, is struggling. Mainland tourists, who make up a significant percentage of business in Hong Kong, and 80% of the visitors, have not been visiting since mid-2019. Tourism globally is also severely affected, as is business travel. The majority of Cathay Pacific planes are grounded in Chep Lap Kok airport. Many businesses are running on a part-time basis and many employees are working from home. Even schools are closed. Even the courts have been closed and are only making allowance for urgent and essential court hearings, with a gradual resumption of business from this week if public health considerations allow.

Add a divorce into the mix and matters will almost certainly become even more stressful. There are significant challenges for many couples seeking an independent life with the division of their marital capital, but when the value of the family pot is much diminished, tensions become ever higher. Financial security following divorce is normally high on the priority list and with a shrinking capital value, both sides will inevitably become more combative.

Need to vary a settlement?

In addition, a slowdown in the economy may lead to redundancies or the request for no pay leave. This not only effects current divorces but may also have an impact on previous settlements where a party has agreed to pay the other a monthly maintenance sum, normally to the primary caregiver of the children and for the monthly needs of the children. With a loss of employment and a pay cut, there may well be a flood of variation cases with payers seeking to reduce their liabilities.

Although payment of monthly maintenance may be advisable when the capital available has been reduced and there is not enough available to achieve a clean break, it is vulnerable to variation should matters get even worse.

Going for a clean break?

A clean break settlement means that both parties involved in the divorce will have no financial ties to each other once the court order is implemented. This is something that the Courts, and most divorcing couples, would prefer as it allows both parties to move forward and be financially independent from one another.

Currently all businesses, including family-run entities, are suffering and the valuations which they may have achieved this time last year, could be drastically different this year. The same goes for property prices, which are down over 20% from the middle of last year. As a result, the capital value of marital assets will have decreased, as would the dividends from family-run companies and, increasingly, as the downturn continues, rental income from property portfolios. This could dramatically alter a divorcing couple’s financial settlement as the available assets may not be enough for the couple to achieve a clean break.

There is no obligation for the Hong Kong courts to put a clean break in place but when there are sufficient funds available it will endeavour to ensure that both parties exit their marriage with enough financial security for the future. The court will assess all assets and income owned by the couple in any location, either solely or jointly. This can cause difficulty when dealing with individuals residing in Hong Kong as many have assets all over the world, but may be an advantage these days where a geographical spread of the portfolio could be good news.

Getting a balanced settlement

In order to achieve a clean break, there needs to be an assessment of what the financially weaker party requires on a monthly basis. This may result in a capitalized lump sum payment. Care must be taken to ensure that there is a fair division of risk as well as assets. With the current economic environment in a state of flux it is important not to leave one party with the more risky illiquid assets and the other with the financial security of cash. It is the court’s duty to achieve a fair solution for both parties and to take such factors into consideration, and those advising clients should be aware of the pitfalls.

We saw this in Hong Kong during and following the last financial crisis, where one party may have been left with illiquid investments which had decreased in value, while the other had liquid capital. The court cannot vary the amount of a lump sum, only the terms of the payment, and therefore it was unable to change the orders which had been made. The result in reality was that one party was left with considerably more than half, which had not been the intention of the parties nor the court. Once the order has been made, there is precious little that can be done retrospectively. Particular care should therefore be taken in such an economic environment.

Increasingly, where there is uncertainty around the viability of capital assets, divorce settlements will include the payment of monthly maintenance payments, perhaps in addition to a more modest lump sum. As the amount of a monthly maintenance can be varied with any change in circumstance, this therefore provides some flexibility in the settlement to allow for external events which may impact the parties’ future financial security. It is possible to have a joint lives maintenance agreement or a fixed term depending on what may be appropriate in the circumstances.

Practical matters; adjournments and revaluations

The current crisis also has an impact on the practice of family law. We are already feeling the pressure of mounting cases which have been adjourned but there may also be considerable adjustments to the valuations already given to the court. For many cases, new valuations will have to be sought from experts, more papers filed with the court and, regrettably, an impact on legal costs as a result.

In conclusion, during times of financial uncertainty, careful consideration of what will be a secure settlement is required when balancing liquid and illiquid assets. It might also be more appropriate to use monthly maintenance payments during this period, rather than settle with a clean break. Unsurprisingly, where possible, couples are increasingly looking to put their divorce on hold until the global economy and politics at home stabilize and the threat from COVID 19 recedes, in order to protect their assets. This could be a very good idea, given the current climate and let’s hope for some good news for Hong Kong later in 2020.

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