Why ‘divorcing’ couple could not hide their $12m from creditors

Source: Straits Times
Article Date: 08 Sep 2024
Author: Tan Ooi Boon

Judge says man's move to transfer all of his assets to ex-wife not immune from bankruptcy action.

A businessman who was up to his neck in debt and facing ruin came up with what he thought was a crafty ploy – file for divorce, willingly give his former wife all of his many millions of dollars worth of assets, and so keep the creditors off his back.

Like many such ploys devised under the heat of financial pressure, the eyebrow-raising stunt only succeeded in arousing the suspicion of the official handling the bankruptcy. He promptly applied for a worldwide injunction to freeze the ex-wife’s assets, which included four condominium units worth over $12 million, so that the money could be used to pay off creditors.

The move was necessary because there was a high risk that the money would be dissipated, given that three of the condo units had already been sold, with the ex-wife allegedly stashing $3 million of the proceeds in cash at home.

The case had all the elements of a TV drama because the couple – Mr Li Hua and his wife Xia Zheng – were accused of using their companies, Sunmax and SMGC, to run a fraudulent scheme to obtain over $65 million from investors.

This was done under the guise of Sunmax appointing SMGC as an investment manager to earn substantial fees for its services. Between 2009 and 2017, Sunmax paid over $14 million to SMGC as fees for its services, with around $8 million of this going to the couple as “directors’ fees and dividends”.

In 2016, Sunmax began telling investors that it was facing substantial losses, even though some investors had signed agreements stating that their capital sums would be protected. Disgruntled investors began suing Mr Li, prompting him to start transferring assets to his then wife.

In 2019, the couple filed for divorce. An interim court judgment obtained by consent involved Mr Li giving his half-share in all four properties, plus an undisclosed amount of all his money, to his ex-wife. He also agreed to pay the mortgage on the properties, as well as $2,000 a month in child maintenance, even though he would be penniless after giving everything away.

Soon after this transfer took place, the ex-wife pocketed over $7 million after selling three of the condo units. The couple continued to live in their remaining $5 million home in the Orchard Road area, even after Mr Li became a bankrupt a year later.

When creditors came knocking, Ms Xia sought to use the divorce judgment to fend off the bankruptcy action that was trying to recover Mr Li’s assets.

But High Court Judge Aedit Abdullah noted that the transfer under the divorce order would not be “immunised” from the bankruptcy action. This was especially so because the order was so onerous on the husband that this raised suspicion that the couple had an ulterior motive in their split.

“It did not appear to be a rational division of matrimonial assets for the bankrupt to voluntarily impoverish himself by transferring ostensibly every asset he had in Singapore to Ms Xia, while also undertaking to pay child maintenance, in circumstances where he had no income,” the judge said.

Justice Aedit then granted an injunction to prevent Ms Xia from dealing with her assets because he was satisfied that the divorce “had been the product of collusion” between the couple.

Here are three lessons from the case on why it does not pay to misuse the law to deceive others.

An unjust division

In their haste to hide their loot, the couple’s unusual way of piling all the assets onto the spouse who was not being sued caused the creditors to smell a rat. When the deed was scrutinised in court, the ploy fell apart because a key principle of matrimonial law is that each spouse is entitled to a “just and equitable” share of the family’s assets.

There was certainly something fishy here because no spouse would disown everything in a divorce.

“In this case, it would, to my mind, be a vanishingly rare case, if ever, for a court to find the total impoverishment of the husband to be a ‘just and equitable’ division of the matrimonial assets,” Justice Aedit said.

That the divorce order was so disproportionately skewed in favour of Ms Xia was a weighty factor in concluding that it must have been the product of collusion between the couple.

Misleading the court

The High Court found that the couple had not been truthful and had made outright misrepresentations to the Family Court during their divorce.

Although the couple claimed that the divorce was due to “irretrievable breakdown based on continuous separation of four years”, they continued to live together in their Orchard condo. A report by private investigators engaged by the private trustee handling the bankruptcy contained multiple pictures of Mr Li at the unit and driving a car owned by Ms Xia.

This ran counter to Ms Xia’s case that they had “frequent quarrels” and that their marriage “could not be saved”. Justice Aedit found that the couple had colluded in misleading the Family Court that their relationship had irretrievably broken down in order to procure a divorce and the subsequent order to transfer the assets.

They also did not disclose that one of the properties had already been sold and another was in the process of being sold when they asked for the transfer order. Failing to disclose this to the Family Court was clearly “an omission falling foul of the standard of full and frank disclosure”, the judge said.

He added he was satisfied that the private trustee had made out a good case that the divorce interim judgment had been obtained on “false pretences and material concealment”.

Risk of money missing

Although the value of Ms Xia’s assets was not known, she did not dispute that she received the $7.44 million in sale proceeds from the three properties. She also admitted in separate proceedings that she had withdrawn at least $3.2 million of this and kept it in her home.

This alone would support the argument of “swift and easy dissipation” of the money, given that she kept the cash with her. Even the balance of the sale proceeds that was kept in her bank accounts could be easily withdrawn or transferred because she was known to have moved substantial funds around in the past.

“All in all, there was little by way of hoops that had to be jumped through by Ms Xia to dissipate the sale proceeds, given their highly liquid nature,” the judge said.

In her attempt to stave off the order to freeze her assets, she tried to paint a picture that she had cash flow problems and could hardly keep up with expenses.

For instance, she claimed that the mortgage payments of $17,000 a month she was making for her Orchard home would soon deplete the $80,000 in cash she had at home.

But this claim gave the private trustee more bullets to shoot her case down because it begged the question as to what had become of the $3.2 million in cash she had withdrawn previously.

If her claim that she had only $80,000 at home was true, this meant that almost all of the withdrawn sum had already been dissipated.

“In these premises, the fact that Ms Xia had ostensibly already spirited away a large sum of money resoundingly confirmed the need for a Mareva injunction,” Justice Aedit said, in granting the private trustee’s application for a worldwide injunction covering up to $12.44 million of her assets.