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UK ruling flags change in divorce deals

Howard Bilton

South China Morning Post

24 October 2010

Would having a prenup have helped the two Hong Kong men who have gone to the highest court over rulings that a parting couple's assets should be split evenly? Previously, not, but a recent ruling in the UK could change that.

This week the Supreme Court in the United Kingdom confirmed the judgment of the Court of Appeal reducing the divorce settlement granted to Nicholas Granatino because of a prenuptial agreement. This has farreaching implications for divorce settlements in the UK and is likely to be followed by the Hong Kong courts, so probably has the same implications here.

Katrin Radmacher and Nicholas Granatino married in London in 1998. She was a wealthy German heiress and he was a banker then working for JP Morgan and earning significant sums – at least significant to us, nonbankers.

Three months before marriage, they signed a prenuptial agreement in which they agreed that if the marriage broke down they would not make financial claims on each other. The agreement was in German and Granatino did not see an English (or French) translation of it but he did have its main provisions explained to him in English by Radmacher's family solicitor.

The loving couple did not exchange details of their respective finances although it must have been apparent that she had a lot and he did not. The couple separated in October 2006. During the subsequent divorce proceedings Granatino claimed a capital settlement and financial maintenance from Radmacher.

At first instance the court awarded him nearly £6 million (HK73.38 million) and said the agreement was not decisive but was persuasive only. The judge also said the agreement was defective in English law because: a) the husband had not received independent legal advice; b) there had been no financial disclosure or negotiation; c) there was no provision in the agreement for the children; and d) the agreement did not allow the husband to make a financial claim even in the event of real need such as his Ferrari needing replacing.

The judge did say that, despite the defects, the agreement was still persuasive but awarded Granatino £5.56 million plus funds to purchase a home near the children but said that without the agreement, he would probably have received more.

Radmacher, who was by then estimated to be worth £100 million, appealed and the Court of Appeal agreed with her arguments that the agreement should be decisive and reduced Granatino's award to only around £1 million, which he was entitled to under the Childrens Act 1989.

This was a bit of a nuisance for Granatino, who had largely given up work.

In effect the Court of Appeal upheld the agreement in its entirety and disallowed any claim by Granatino other than in relation to the children's maintenance. The Supreme Court affirmed the judgment of the Court of Appeal by a majority of eight to one.

To prove the court was not sexist, Lady Hale, the only woman on the panel of nine, dissented and sided with Granatino. The president of the court, Lord Phillips, said prenuptial agreements could have decisive or compelling weight if they passed three key tests: a) the agreement should be entered into voluntarily by both parties; b) both parties should have the benefit of independent legal advice; and c) both sides should make full financial disclosure.

They upheld this agreement despite the fact that it failed on two out of the three criteria laid down by Lord Phillips. The court did not say that prenups should be binding irrespective. But in determining how to weigh an agreement the judges voted for an “unless test”: the agreement will be given effect unless it would be unfair to do so.

Based upon this decision, it now seems highly likely that most persons of wealth will want to settle a prenuptial agreement before getting married. It might be argued that such agreements encourage romance, or certainly encourage marriage, as they may persuade wealthy people to get married when otherwise they might choose not to do so because they would be unable to protect themselves from an avaricious estranged spouse.

Many London papers are commenting that the decision enhances London as a place to live and get married (and get divorced). Previously wealthy persons might have avoided the city because UK courts routinely award huge settlements to estranged spouses under the equality of division principle.

There is nowhere better to get divorced than the UK if you are the poor partner of a wealthy spouse. While UK court decisions are not binding on the courts of Hong Kong, they are still considered highly persuasive, as demonstrated again in the case of the two Hong Kong men approaching the higest court. They are disputing the lower courts' decision to split assets evenly, which is in line with the principle followed by English courts.

So from now on, we can expect to see Hong Kong courts following this practice and declaring properly prepared prenuptial agreements as being highly persuasive when it comes to divorce settlements in Hong Kong.

As things stand at the moment in Hong Kong, divorce courts tend to follow the UK when it comes to financial settlements and start with a presumption that the assets will be divided equally between a divorcing couple unless there is some good reason why this shouldn't apply. For this reason it has become very expensive to get divorced in Hong Kong.

Even assets held in trust are not safe as the courts have been following the tendency of the UK courts to treat trust assets as belonging to the settlor of that trust. Hong Kong courts have power within s6(1)(c) Matrimonial Proceedings and Property Ordinance (Cap 192)1to carve out a sub-trust for the benefit of the spouse.

Trusts can protect assets if the settlor does not and cannot benefit. It may also help if the stated purpose of the trust is to hand down assets to later generations.

Certainly, if a trust is going to protect assets against a matrimonial claim, it must be properly set up and administered, and the settlor will need to show that they do not and cannot treat the assets as though they still belonged to them. Many trusts will fail this test.

In the two cases being heard together in Hong Kong's Court of Final Appeal, it is being argued that the equal division principle should not apply and the lower courts who awarded large settlements to the wives in both cases were wrong to follow UK principles.

Before the ruling that assets should be split evenly, Hong Kong courts used to assess the spouses' “reasonable requirements” and then divide the assets accordingly. They would then award what was left to the breadwinner.

Both these cases are ongoing and the results won't be known for some time but if the husbands succeed, Hong Kong settlements will return to the days when spouses could only recover what they reasonably needed and not half of everything.

Whatever the outcome of these cases, it seems as though a prenup can definitely help protect assets so any wealthy individual would be a bit silly not to have one. Your intended may not like it but then, if they don't, you may suspect their motive and react accordingly. Probably the best approach is: put everything of substance into trust before marriage and have a prenup.

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