Divorce Proceedings and Your Business Part 1

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.

Adrian Au and Sam Ng (Gilt Chambers)

For specific advice on your situation, please contact:

Adrian Au
Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.