In the first article of Trust Focus Week, we mentioned that one of the ways a settlor can retain some control in the trust is by reserving investment management powers. However, if a trust is set up with a professional trustee, reserving such powers does not necessarily mean the trustee need not take any responsibility over the settlor’s investment decisions. The recent decisions in Zhang Hong Li and others v DBS (Hong Kong) Ltd and others [2018] HKEC 2081 serve as a reminder to professional trustees that “anti-Bartlett” provisions do not make them “liability-free rubber-stampers” of their clients’ investment decisions.
Background and Parties
In 2005, a couple set up a Jersey family trust (the “Trust”) with the assistance of DBS Bank. The assets of the Trust were held by Wise Lords Limited (“WL”), a BVI company formerly owned by the wife. DBS Trustee, a wholly-owned Jersey subsidiary of DBS Bank carrying on business as a professional trustee / trust management company, was appointed as the trustee of the Trust. After the trust was set up, DBS Trustee nominated DHJ Management, a BVI corporate services and corporate nominee subsidiary of DBS Bank, to act as director of WL.
The couple, i.e. the settlors of the Trust, were experienced investors. The wife was appointed as the investment advisor of WL and indeed was the decision maker in respect of the investments made by WL at all material times.
From January 2005 to April 2008, WL invested principally in mutual funds, and such investments were highly profitable (with an overall profit of more than HKD 132.6 million or USD 17 million). However, WL incurred substantial losses when it began to invest more heavily in foreign exchange transactions and decumulators, in 2008. From March 2018 to March 2019, WL suffered a net reduction of 70% in its net asset valuation.
The Actions and the Appeals
In 2011, the couple, WL, and the new trustees replacing the DBS Trustee (the “Plaintiffs”) commenced actions against DBS Bank, DBS Trustee, DHJ Management, DBS Corporate (DBS Bank’s Hong Kong corporate services and corporate nominee subsidiary), and individual employees of DBS Bank (the “Defendants”), seeking equitable compensation in respect of the investment loss.
The Judge in the Court of First Instance (“CFI”) dismissed the Plaintiffs’ claim against DBS Bank, DBS Corporate and the individual employees. However, the Judge found against DBS Trustee and DHJ Management on the basis that they had breached their high level supervisory role in respect of WL’s investments. The CFI judgment was later affirmed by the Court of Appeal (“CA”). Subsequently, the application of DBS Trustee and DHJ Management for leave to appeal to the Court of Final Appeal was also refused.
High level supervisory role assumed by DBS Trustee and DHJ Management
The CFI Judge found (and the CA confirmed) that DBS Trustee and DHJ Management had assumed and had breached a high level supervisory role in respect of WL’s investments, despite the fact that the structure of the Trust “was deliberately designed to permit a measure of independence and flexibility on the part of [the wife] advising and executing investments”. As recognized by DBS Trustee, the purpose of such high level supervision was to ensure that the value of the trust fund was subject to appropriate controls, reviews, investment expertise and management.
It is noteworthy that the wife’s power to make investments was subject to the power of DBS Trustee and DHJ Management to override the wife’s investment decisions or to reverse transactions that she conducted for WL.
“Anti-Bartlett” provisions
Counsel for the Defendants submitted that the trust deed contained certain provisions that disapplied any duty, and removed any power, which DBS Trustee might otherwise have had in relation to WL, unless it gained actual knowledge of dishonesty. These provisions are commonly called “anti-Bartlett” provisions, serving dual purposes of (1) allowing a company to function without interference from the trustee who holds shares in the company and (2) relieving the trustee from any such duty and, in some cases depriving it of the power to intervene.
Although the CA accepted that the relevant “anti-Bartlett” provisions were effective under Jersey law (the governing law of the Trust), it held that such provisions did not exclude the high level supervisory duty of DBS Trustee and DHJ Management. DBS Trustee and DHJ Management ought to have exercised their power to interfere with the administration of the Trust and their power to inquire about the transactions in question before approving the same, so as to discharge their high level supervisory duty over the investments made by WL in circumstances where “no reasonable trustee could lawfully refrain from exercising such powers”. The same reasoning applies to DHJ Management.
Causation
The CA rejected the submission of Counsel for the Defendants that the CFI Judge had omitted to consider causation and held that strict rules on causation applied. Causation was established on a “but for” basis and that common law causation rules on remoteness and foreseeability did not apply to the present case. The CFI Judge held that the breaches of DBS Trustee have directly led to diminution of the value of the assets of the Trust and such ruling was upheld by the CA.
Conclusion
This case illustrates how a professional trustee may be found in breach of trust despite the incorporation of “anti-Bartlett” provisions in the relevant trust instrument. It is also worth noting that the CA found against the professional trustee even though the wife being the investment advisor of the Trust ignored repeated warnings about the risks of over-concentration and refused to diversify WL’s portfolio or to take a profit before it was too late to have the highly risky investments liquidated.
It is perhaps reassuring for settlors to know that the Hong Kong courts hold professional trustees to a very high standard when exercising their fiduciary duties for the best interests of the beneficiaries. Strong protection from the courts may be another reason why professional trustees may be preferred.
Update
Following the publication of this article, the case was brought to the Court of Final Appeal, which published a judgment (notwithstanding that the parties ultimately settled) ruling that, among other things, the anti-Bartlett provisions in the Trust Deed were valid and effective in excluding the high-level supervisory duty on the part of DBS Trustee and DHJ Management to oversee and/or intervene in the business of WL. This decision has been welcomed by trustees in affirming the effectiveness of anti-Bartlett provisions.
Our team at Hugill & Ip has extensive experience in dealing with Hong Kong’s contentious Trust issues – so if you need further advice on these subject, get in touch with us to find out how we can help.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.
