The Official Journal of The Law Society of Hong Kong – (Feb 2020)
【Is a “Clean Break” Possible in an Economic Downturn?】
2019 was a difficult year, particularly for people living and working in Hong Kong. The city faced many challenges with the political unrest culminating in great uncertainty economically, exacerbated globally with the trade war between China and the U.S. and further uncertainty caused by Brexit. This uncertain economic climate may affect the division of assets in a divorce, with trends suggesting that low income couples and high net worth couples who are extremely investment heavy, are impacted the most.
For families whose assets are investment heavy, a severe downturn in the economy will have a huge impact on the size of the family pot. As a result, the capital value of marital assets will have decreased, as would the dividends from family-run companies and, increasingly, as the conflict continues, rental income from property portfolios.
This could severely alter a divorcing couple’s financial settlement as the available assets may not be sufficient for them to achieve a “clean break”, which is something the Courts, and most divorcing couples, would prefer. In order to achieve a clean break, there will be an assessment of what the financially weaker party might need on a monthly basis going forward, a capitalised sum, which is assessed into a lump sum payment. Whereas this is usually considered fair and manageable, the result will often be that one party has a cash lump sum and the other has illiquid assets. In the current economic environment of dramatic flux, this can create an unfair situation.
During the financial crisis in 2008, there have been cases in Hong Kong divorce courts where one party was left with illiquid assets and the other had a cash lump sum. The court was not able to change the order which had been made, because it is not possible for the court to vary a lump sum (the terms of payment may be varied but not the amount itself). The parties may have settled that it would be fair to split the marital pot equally but by the time the assets come to be divided, one party is receiving considerably more.
Increasingly, rather than settling for a clean break and allowing both parties to live independently from each other, the settlement will involve a monthly maintenance payment, which can be varied if there is a change in circumstances for either of the parties, such as the loss of employment or the loss of dividends, which either results in a greater need to receive maintenance, or less ability to pay it.
Therefore, in times of financial uncertainty, careful consideration of what is a secure settlement when balancing liquid and illiquid assets is required. With this in mind, it is unsurprising that high net worth couples are looking to protect their assets by putting the divorce on hold until the global economy and politics at home stabilise.