postimage

    10:48 PM Martin Kwan (LLB (Lond.), LLM (LSE))

    Can a wife consider her husband’s family business obtained from his father as a “matrimonial asset”?

        

    In the recent Court of Appeal decision of UEQ v UEP [2019] SGCA 45, the issue was whether, on divorce, the husband’s shares of the family business received from his father as a gift can be treated as a “matrimonial asset” for division. This case has profound impact, as the legal principle applies equally to gifted or inherited family businesses and provides valuable insights on the entitlement of the non-recipient spouse. It is also particularly relevant and important, because obtaining wealth through taking over a family business is fairly common in Singapore and even in Asia.

                                     

    The applicable laws and facts are simple. Section 112(10)(b) of  the Women’s  Charter  (Cap  353,  2009 Rev Ed) provides that a gift or inheritance received by one party to the marriage must be “substantially improved during the marriage by the other party or by both parties to the marriage” for the asset to be considered a “matrimonial asset” for division purposes (emphasis added).

     

    The legal question was whether contribution made by a spouse to the asset before it was gifted to the other spouse could be taken into account as “substantial improvement” (at [1]). In this case, the husband originally (before the marriage) held 8% of shares (20,000 shares) of the supermarket run by his father (with his father holding 85%, his mother holding 5% and his sister holding the remaining 2%) (at [5]). They were married in 2003. In 2012, the husband was given 60,000 more shares (at [7]). The wife worked substantively for the supermarket before the transfer of the 60,000 shares, and stopped so at the birth of their third child (at [6]).

     

    It was accepted by the Court that the 20,000 shares would be included as “matrimonial assets” because of the wife’s contribution (at [10]). However, for the 60,000 shares, since the wife had stopped working before the transfer, the issue became whether past contribution can be counted for the purpose of s. 112(10(b) (at [12]). It was held that it cannot (at [1]) and should not (at [18]) be counted.

     

    The Court offered three justifications. First, s 112(10) pays due regard to “the donor’s intention”. The starting point is that “if I give a gift to someone, I do not, ex hypothesi, intend his or her spouse to have a share in it” (at [14], citing Chen Siew Hwee v Low Kee Guan (Wong Yong Yee, co-respondent) [2006] 4 SLR(R) 605 at [32] per Phang J (as he then was)).

     

    Secondly, the provision also recognises the “need to prevent unwarranted windfalls accruing to the other party to the marriage” (at [14], citing Chen Siew Hwee at [32] per Phang J (as he then was)). Therefore, the view, that a couple should be prepared to share any windfall as a marriage would imply sharing the good fortune, was rejected, as it is inconsistent with the statutory wording (at [13]-[14]).

     

    The exception of s 112(10), which concerns whether there has been substantial improvement, is based on the notion of fairness. It is only fair and just to allow a spouse to share a gift or inheritance made to the other spouse if the former has made a contribution to the gift or inheritance. This fairness principle is consistent with (1) the need to prevent windfall, and (2) the donor’s inferred intention not to benefit the non-donee spouse (at [15]).

     

    Thirdly, given the contribution was made before the receipt of the gift, it meant that the wife’s contribution “would have been effected with the knowledge that such contribution would improve a third party’s asset” (at [17] (emphasis added)). This is why contribution must come after the receipt.

     

    Practical takeaways

     

    This decision has two practical implications on asset division following divorce. First, it provides a useful lesson to those working in his/her spouse’s family business. If a spouse wants to include a family business which will be gifted to or inherited by the other spouse as a matrimonial asset, he/she should work until the other spouse obtains it, and should afterwards continue to work for the family business for some time in order to amount to substantial contribution.

     

    It is perhaps tempting to think, especially by lay people, that the family business will be included as a matrimonial asset just because (1) the nature of business is a family one, and (2) most likely, if not certainly, it will be taken over by his/her spouse someday in the future. This is especially the case as Asian families usually have a strong tradition of passing family wealth on to the next generation. The Court has helpfully clarified that the statutory provision of s 112(10) is designed to pay due regard to the donor’s intention. If the spouse’s father/mother (current owner of the family business) does not make a gift of the shares of the family business to the claiming spouse, it is difficult to include them as “matrimonial assets” unless contribution has been made by him/her.

     

    Secondly, it is interesting to note that the argument on whether homemaking and child-caring could count as “substantial improvement” was not discussed. Presumably, the reason why the wife stopped working for the supermarket was because she had to take care of their newly-born third child. It is very likely that homemaking may not be recognized as substantial improvement, because (1) if it will, the court and the parties would have raised and discussed this obvious point, and (2) the framing of the issue as whether past work could count strongly suggests that only work  that is directed at or related to the family business would usually be sufficient to make it just and fair to run contrary to the donor’s intention.

     

    In terms of the legal takeaways, the Court’s decision, in holding that past contribution does not count, has the advantage of being certain and simple to apply. It generates clear answers on whether a spouse can include certain gift or inheritance as a “matrimonial asset”. The certainty would also assist family asset planning.

     

    However, at the same time, there are a few aspects which have not been fully considered, such as the unique nature of family business and the role of homemaker and child-carer. These will be discussed below.

     

    The justifications may not always hold, and are not entirely persuasive for cases involving family businesses

     

    The three justifications provided by the Court do not always hold. Regarding the first justification on the donor’s intent, it is based on an imputed or presumed intent on the part of the donor (at [15], the Court used the word “inference”, which judging from the context seems to be referring to imputed or presumed intent). Thus, this means that there could be situations where the imputed or presumed intent is not the same as the actual intent. Imagine in a situation where the husband’s father has an actual belief that giving the family business to his son is the same as giving to his daughter-in-law and the father has now died. Not only is it difficult to prove the actual intention, the Court’s reasoning seems to suggest that the actual intention plays no role in s 112(10)(b) (and the wife may have to resort to other principles such as the law of trusts, but not s 112(10)(b)).

     

    The second justification is also not entirely persuasive. It is based on the premise that the inclusion of the family business as a matrimonial asset, when there has been no contribution in the form of work, would create an unwarranted windfall. The parties and the Court should have considered whether contribution, in the form of homemaking and child-caring, would count. In this modern society, it is strongly arguable that work is not the only form of contribution. Homemaking and child-caring have been widely recognised in numerous jurisdictions as an equally important contribution. There is a New York Court of Appeal case (Price v. Price 69 N.Y.2d 8 (1986)), which has similar facts and was decided based on a comparable statute, but the contrary conclusion was reached by taking into account homemaking as a form of contribution (which will be discussed below).

     

    Regarding the third justification, again, it is based on some imputed or presumed intention on the part of the wife (at [17], where the Court said the contribution by the wife “would have been effected” to improve a third-party’s property). It presumed the wife has treated the family business of her father-in-law as some remote third-party’s. What if the wife has a realistic expectation and in fact contributed on the understanding that sooner or later, her husband will receive a bigger portion of the family business from his father? This would suggest that the third justification could not take into account the actual intention to the contrary. In fact, this argument is consistent with what the Court said at [16], that where contribution by the non-titled spouse to the asset in question was made “with the knowledge that the asset belonged to a third party without any expectation of either party to the marriage acquiring it”, it “would be an unwarranted windfall” (emphasis added). In other words, this demonstrates that the actual expectation should have been relevant.

     

    Arguably, it is suggested that the justifications are strong and persuasive in other contexts, but they simply cannot be suitably applied to cases involving family businesses. The unique nature of family businesses and the expectation (and perhaps the culture) of taking over of it by the next generation in Singapore and Asia would arguably require a different treatment. It is very different to other situations, such as where a husband received a Rolex or a car from a friend/colleague. The wife should not have a share of it, as the gift was clearly intended for the husband only. In the latter situation, the friend would be an uncontroversial “third party”, but in the case of family business, it would be more difficult to determine if the father/mother-in-law is really the same kind of “third party” like the friend.

     

     

    The highly comparable case of the New York Court of Appeal

     

    Price v. Price 69 N.Y.2d 8 (1986) was a decision of the New York Court of Appeal. It has still been widely and recently cited, e.g., in G.M. v. M.M. 50 Misc.3d 956 (2015) at 960; Larowitz v Lebetkin 2019 NY Slip Op 02273; Albanese v. Albanese 69 A.D.3d 1005 (N.Y. App. Div. 2010) at 1006. It has also been cited academically, e.g., in Nicole Giannakis, ‘Faking Equity: A Critique of the New York Equitable Distribution Statute as Applied to Licenses and Degrees under the O’Brien Decision’ (2014) 30 (1) Touro Law Review 181 at 194.

     

    The facts of Price v Price were very similar to the facts of UEQ v UEP, and it was decided based on comparable laws. Regarding the applicable laws in New York (“NY”), gifts are not included as “matrimonial property” and would be counted as “separate property” (i.e. non-matrimonial property). However, the amount of appreciation in the value of the gift could be included as a matrimonial property if the “appreciation is due in part to the contributions or efforts of the other spouse” (New York Domestic Relations Law (DRL) § 236(B)(1)(d)(3)) (emphasis added). The criteria based on “contribution” under NY law is comparable to Singaporean law, because in the present Singaporean case, the Court also used the word “contribution” throughout the judgement. On the facts of the NY case, the family business was similarly obtained incrementally by the husband as a gift from his father and the wife has briefly worked for it before (at 12).

     

    The issue was whether the terms "contributions or efforts" would include contributions as a homemaker and parent. It was held that they would count, because homemaking and child-caring would allow the husband to be fully devoted to management of the family business. Therefore, the wife’s contribution should be recognised (at 18).

     

    Interestingly, the NY Court distinguished other situations where homemaking would not be considered as contribution. This would include situations where the asset’s value increases due to inflation or market force, i.e. the increase in value is not due to husband’s efforts made possible by the wife’s homemaking role (at 18).

     

    Should Singaporean courts take the same approach as the NY Court?

     

    It is suggested that homemaking and child-caring should be considered as substantial contributions for the purposes of s 112(10)(b). This is because of three reasons. First, if these are not considered as substantial contributions, there would be an inconsistency, such that on the one hand, homemaking is recognised as contribution at the asset division stage (under s.112(1)); on the other hand, it is not recognised as sufficient at the s 112(10)(b) stage on deciding whether an asset is a matrimonial asset. If an asset is not recognised as a matrimonial property in the first place, it could not be included for division between the divorced couple. Therefore, if homemaking and child-caring are not recognised at both stages, the effect is that the recognition at the division stage would be rendered futile. This effectively undermines the overall recognition of homemaking.

     

    At the division stage, the Singapore courts have clearly and rightly emphasised the equal importance of homemaking:

     

    The philosophy underlying what is known as the “broad-brush approach” is that mutual respect must be accorded for spousal contributions, whether in the economic or homemaking spheres, as both roles are equally fundamental to the well-being of a marital partnership... (ANJ v ANK [2015] 4 SLR 1043 at [17]. See also TNC v TND [2016] SGHCF 9 at [33]; NK v NL [2007] 3 SLR(R) 743 at [20]).

     

    Secondly, and very importantly regarding the objective of s 112, Phang JA has held that “[t]he objective of s 112 of the Act is to remedy any economic prejudice caused by the performance of different roles in the family” (NK v NL [2007] 3 SLR(R) 743 at [37]; approved in BUX v BUY [2019] SGHCF 4 at [45]). Furthermore, the wording of s 112(10)(b) does not apparently exclude homemaking as “substantial improvement”.

     

    Thirdly, if homemaking and child-caring are not recognised substantial contributions, and a wife who has stopped working after her husband (or the vice versa) receives the family business in the form of a gift or inheritance will not be able to include it as a matrimonial asset, it may discourage the taking up of these homemaking roles. The law should recognise that in domestic partnership, both spouses work as a team for the betterment of their family, based on the needs of their family. They may take on different roles at different points of their family life.

     

    Rethinking the proper extent of inclusion of gift or inheritance as matrimonial asset: A comparative analysis

     

    Finally, there is a need to consider more deeply whether the extent of inclusion of gift or inheritance as matrimonial asset is too limited, by comparison to other common law jurisdictions. The key point that is made here is that comparative reference should be made to foreign laws that do not determine whether a gift or inheritance is included solely by reference to contribution alone. Other factors will be taken into account, such as the needs of the other spouse and any dependence on that asset.

     

    England and Wales

     

    Under English law, “matrimonial property” is not defined statutorily. Gift or inheritance are not by default excluded from division in the first place, though the division may depart from equal sharing.  In other words, even if an asset is classified as a non-matrimonial asset, it can still be divided, but the extent to which they will be divided will be different (Jane Sendall, Family Law 2019, (Oxford University Press, 2019) at 102).

     

    In terms of division, it is possible for English courts to hold that the gift or inheritance in question is to be kept by the recipient; but it is also possible for the court to divide it to various extents (Robson v Robson [2010] EWCA Civ 1171 at [43(8)]; White v White [2001] 1 AC 596 at [42]). The extent of division would depend on mainly three factors (Polly Morgan, ‘Property Division on Divorce’, in Ruth Lamont (ed.), Family Law (Oxford University Press, 2018) 115 at 147).

     

    Firstly, it depends on whether the non-matrimonial asset has been used as a matrimonial property (e.g. the parties lived off the inheritance). Secondly, the needs of the parties are very important (White v White [2001] 1 AC 596 at [43], approved by Lord Nichols in Miller v Miller [2006] UKHL 23 at [23], providing that the distinction between matrimonial and non-matrimonial asset will only be made if the parties’ needs could be satisfied). Thirdly, the length of the marriage matters.

     

    Hong Kong

     

    Hong Kong maintains a similar position to England and Wales. At the stage of identifying “matrimonial” and “non-matrimonial” property, the distinction does not matter under Hong Kong and both types of property are to be included. The distinction is only relevant at the stage of asset division (LKW v. DD [2010] HKCFA 70 at [71]).

     

    Canada

     

    Different provinces have different laws. In Saskatchewan, an inheritance is presumptively to be equally divided between the parties (Ward v Allison, 2019 SKQB 95 at [129]; s 21 of the Family Property Act (SS 1997, c F-6.3)). By contrast, in Alberta, s 7(2)(b) of the Alberta Matrimonial Property Act (RSA 2000, c M-8) excludes gift or inheritance from distribution by default (Coughlan v Coughlan, 2014 ABQB 471 at [45]). However, the increase in value of that gift or inheritance can be included after taking into account the contribution of the other spouse, needs, duration, etc. (reading s 8 together with s 7(3)).

     

    Conclusion

     

    It is suggested that if there is a similar case in the future, the parties and the court should fully (re-)consider the relevance and importance of homemaking and child-caring at the stage of identifying matrimonial assets, and not only at the stage of asset division. The scope of contribution or “substantial improvement” under s 112(10)(b) should include these contributions (as opposed to contributions the form of work only), when the asset involved is (or is related to) a family business and on consideration of equality of family roles.

     

    In identifying matrimonial assets, it is interesting to note that the laws of England and Wales, Canada, and Hong Kong will take into account other factors in addition to contribution alone. This more liberal approach is, however, not possible under s 112(10)(b) of the Women’s Charter which makes explicit reference to contribution only. Singapore adopts a narrower approach, because, as suggested by the Court, the statutory purpose of s 112(10)(b) is to pay due regard to the donor’s intention of not benefiting both spouses. It is intended that only substantial contributions will justify not giving effect to the donor’s intention.

     

    Balancing the need to recognise the importance of homemaking (which is also an acknowledged objective of s 112 generally) whilst paying due regard to the statutory purpose of s 112(10)(b), it is proposed that a possible approach which balances both aims may be to award a reduced portion to the non-titled spouse at the broad-brushing division stage, instead of completely excluding the family business gifted to or inherited by the titled spouse.

    * This blog entry may be cited as Martin Kwan, “Can a wife consider her husband’s family business obtained from his father as a “matrimonial asset”?”  (15 September 2019) (http://www.singaporelawblog.sg/blog/article/240)

    ** This entry may be downloaded as a PDF file here

Comment Section