STEP Hong Kong | Removal of Trustees

STEP Hong Kong | Removal of Trustees

STEP Hong Kong | Removal of Trustees 1480 896 Hugill & Ip
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We have previously introduced trusts, discussed the hurdle of choosing a trustee, and recently compared trusts to wills. We now address what happens when a beneficiary is displeased with the actions of a trustee, and what methods of legal recourse are available.

There are two main reasons why beneficiaries may bring actions against trustees:

  1. Breach of trust
  2. Breach of fiduciary duties

Another, less common reason we see beneficiaries bring actions against trustees is due to conflict between the group of beneficiaries. Where there is no actionable legal recourse between one family member with another, a trustee may get caught in the middle and sued by a dissatisfied member.

What is a breach of trust and when may it occur?

Duties are imposed on trustees through the trust. If a trustee commits any negligent act or omission in fulfilment of such duties, it may constitute a breach of trust. Additionally, if the trustee profits from his/her breach, he will also be liable, unless it can be shown that the breach was properly authorised by the trust instrument or the beneficiaries.

Examples of breach of trust may include:

  • Failing to dispose of depreciating assets;
  • Using assets for his/her own use;
  • Distributing assets to beneficiaries who are not entitled to them;
  • Investments made exceeding his/her powers;
What is fiduciary duty and when is it breached?

The trustee’s fiduciary duty arises out of their authority and powers to invest (which are authorised from the trust deed, common law, and Part 3 of the Trust Ordinance). Because trustees have such powers, they have a fiduciary duty, that is, to make investment decisions in the best interests of the beneficiaries.

Examples of breach of fiduciary duty may include:

  • Profiting from the trust by selling his/her own assets to the trust;
  • Failing to act impartially in bringing the trust property under their control.
Remedial Actions

The most common remedies for a breach of trust include:

  1. Court proceedings against the trustee for recovery of loss;
  2. Obtaining interim injunctions for protection of the trust during the action;
  3. Court orders for the removal of trustees.
Recovering Loss

Beneficiaries must be able to show a ‘causal connection’ between the trustee’s breach of duty and loss that has been suffered. A trustee will generally be presumed to have dealt with the trust estate honestly and properly, unless the contrary is shown. If causation is established, the trustee will be liable to restore the trust fund to the position it would have been in if the breach had not occurred.

Is the trustee personally liable for breach?

If the Trust estate sustained loss as a result of the trustee’s breach, the trustee him/herself would be liable. If the trustee becomes bankrupt or dies, his/her estate then becomes liable. A trustee may also be liable for interest.

What if there are joint trustees? Who is ‘truly’ liable?

If several trustees are implicated in a breach of trust, they are all jointly and severally liable. The beneficiaries can bring actions against all of the trustees who are liable.

What if the trustee is also a beneficiary?

In the case where a beneficiary – who is also a trustee – commits a breach of trust, the liability may come out of his/her beneficial interest in the Trust property.

Does the trustee have any defences?

Yes, if the trustee can show any of the following, he/she may be relieved from liability:

  • The breach of trust occurred due to necessity or an adequate cause;
  • The action was authorised or condoned by the beneficiary that suffers as a result of breach;
  • It was an innocent mistake.
Is there a statutory limitation to actions for breach of trust?

Normally, breach of trust claims have a limitation of 6 years from the date of knowledge of the breach. If the breach of trust is fraudulent in nature (s.20(1)(a) Limitation Ordinance (Cap 347)), or the beneficiary seeks to recover trust property from the trustee, there is no statutory limitation.

Can the trustee be exempted from liability of breach?

In short, yes. In the landmark case Armitage v Nurse [1997] EWCA Civ 1279, the English Court of Appeal held that in English law, trustee exemption clauses can validly exempt trustees from liability for all breaches of trust except for fraud. Millet LJ held that an exclusion of liability clause for fraud would be considered repugnant and contrary to public policy.

What empowers the change of trustee?

The sources of powers to change or remove trustees include:

  1. The Trust document – there may be express powers for the removal of trustees;
  2. The Trustee Ordinance, Cap. 29 – pursuant to section 60, the Court may remove a trustee if it appears to the Court that the trustee is personally liable for any breach of trust.

It is important to note that the trust law in Hong Kong is based on English Common Law, which is supplemented by local legislation such as the Trustee Ordinance.

Common pitfalls for trustees and how to avoid them

As with many aspects in life, prevention is easier than a cure. While mistakes are not always avoidable, trustees or potential trustees should take reasonable care to minimise such risks.

Conflict of Interest

One of the most common pitfalls is where a trustee breaches fiduciary duty to the Trust, and acts in a manner which creates a conflict of interest. An example of when this may occur, is where a trustee personally enters into financial transactions with the Trust.

The English case Boardman v Phipps [1967] 2 AC 46 is a landmark case exemplifying just this issue. Tom Boardman was the solicitor of a Family Trust, which, inter alia, included an asset of a 27% holding in a textile company, Lexter & Harris. Mr. Boardman was concerned with the accounts of the company and believed a majority shareholding was required in order to protect the Trust. Tom Phipps, a beneficiary of the Trust, went to a shareholders’ general meeting of Lexter. Mr. Boardman suggested to another trustee, Mr. Fox, that it would be desireable to acquire a majority shareholding of the company, but Mr. Fox disagreed. Mr. Boardman and Mr. Phipps came to an arrangement and decided to purchase the majority stake in the company, without the knowledge of other trustees. Consequently, the company made a distribution of capital without reducing the values of the shares, resulting in the Trust, and Mr. Boardman and Phipps all benefitting a value of GB£47,000 and GB£75,000 respectively. Another beneficiary, John Phipps, sued Mr. Boardman and Tom Phipps for the profits, alleging that a conflict of interest had occurred.

The House of Lords held that Mr. Boardman (and Mr. Phipps) had breached their duties to avoid a conflict of interest, and that there was a fiduciary duty (to avoid any possibility of conflict of interest) was owed to the beneficiaries of the Trust, as the transaction included a use of the shares from the Trust assets. Mr. Boardman was held to be liable, as he was speculating with Trust property. The majority held that the fiduciary duty owed was strict and was not dependent on fraud or an absence of bona fides. It did not matter that Mr. Boardman and Mr. Phipps had best intentions for the Trust and resulted in profit for the Trust and the company; they were required to account for their profits.

A method to avoid a conflict of interest, is to seek directions from the Court, which will notify the beneficiaries of the trustee’s intentions, and grants an opportunity for beneficiaries to object. In some circumstances, all the beneficiaries may be required to provide written consent before the transaction can proceed. Where a beneficiary objects to the trustee’s investment intentions, the best course of action is to not proceed with the investment, as it may result in a breach of duties to the Trust and the beneficiaries. It is of utmost importance that a trustee be alert to the issue of conflicts of interest, and immediately address the problem where a conflict arises.

Trustees must exercise the standard of care of an ordinary prudent business person, applying any special knowledge he/she may have (Learoyd v Whiteley).

Accounting

Trustees are often obliged by duty to account to beneficiaries. This requires accurate and complete notes of how the assets of the trust has been dealt with. The general position via case law is that ‘every beneficiary is entitled to see the trust accounts’ (Armitage v Nurse [1998]) and ‘the fundamental duty of trustees is to be accountable to all beneficiaries’ (Foreman v Kingstone [2005] 1 NZLR 841 HC), unless there is an exceptional circumstance to withhold the information from beneficiaries (Foreman).

A beneficiary does not have absolute entitlement to the Trust accounts. They have a right to seek access to the documents (Schmidt v Rosewood Trust [2003]), meaning the fiduciary duty owed by the trustee raises a right to information for the beneficiaries for them to be informed of their interest in the Trust. However, in RNLI & Others v Headley & Another [2016] EWHC 1948 Ch, it was clarified that a beneficiary’s ‘entitlement to accounts’ does not refer to annual financial statements, but rather ‘the very notion of accounting itself. Trustees must be ready to account to their beneficiaries for what they have done with the trust assets. This may be done with formal financial statements, or with less formal documents, or indeed none at all.’

However, in Henchley v Thompson [2017] EWHC 225, the claimant sought an order for the Court to direct the Defendant, an erstwhile trustee of the Trusts, for provision of Trust accounts. The Court held that they have a discretion as to whether or not to make an order for an account to be produced by a trustee, and restated that there is no absolute entitlement for a beneficiary to obtain an order for an account, though the Court will generally exercise discretion to make an order as requested. Consequently, an order for accounts was granted in favour of one beneficiary but declined for another, on the basis that there were sufficiently exceptional circumstances for the judge to not exercise discretion for an order. The second Trust held a property, which was a known quantity, and the judge considered there was no realistic possibility for the Defendant to provide any new information about the asset.

It is also of note that in Henchley, the Court considered whether the Limitation Act can restrict the general duty to account and concluded that it does not appear to fall within. Consequently, a trustee may be obliged to provide accounts many years after active involvement.

A 2017 New Zealand case Ecreg v Ecred provides a list of factors that may be considered when deciding whether, and what information to disclose to beneficiaries:

  1. the type of documents that are sought;
  2. the context for request and object of the beneficiary;
  3. the nature of interests held by the beneficiary seeking access – considering the beneficiary’s proximity and the likelihood of the beneficiary actually benefitting from the Trust;
  4. issues of personal or commercial confidentiality;
  5. practical difficulty for account, such as expense;
  6. whether the documents sought will disclose the trustee’s reasons for his/her decisions made;
  7. likely impact on the trustee and other beneficiaries should disclosure be made;
  8. likely impact on the settlor and third party should disclosure be made;
  9. whether disclosure can be made in light of confidentiality protections;
  10. whether safeguards can be imposed on the use of trust documentation.

It is of note that trustees are not obliged to disclose reasons for decision, or decision-making process, as established in Re Londonderry’s settlement (1957).

Confusion as to Trust assets

The recent appeal to the Privy Council in Gany Holdings (PTC) SA v Khan and others [2018] UKPC 21 revealed just how important it is for a trustee to know about the assets of a Trust.

In the case, Mr. Mohamed Rangoonwala established a Trust in 1982, with the principal beneficiaries being himself, his second wife, his children and their spouses. He appointed Gany Holdings, a Trust Company, as the sole trustee. After his death in 1998, Asif, Mr. Rangoonwala’s son who succeeded his powers to remove and appoint trustees of the Trust, appointed his mother and two others as directors of Gany. Asif also told his siblings that they would be receiving a share of the Trust, approximating US$2 million each, on the condition that the beneficiaries waiving claims in relation to the Trust and their fathers’ estate. Subsequent to the waivers and distribution, only six months after the Mr. Rangoonwala’s death, the trustee, Gany, resolved to wind up the Trust by distributing the entire fund to Asif.

This resulted in Mr. Rangoonwala’s daughter Zorin, son-in-law and granddaughter making requests to the trustee company, Asif, and others who knew about the Trust (such as lawyers) for information about distribution of Trust. Subsequently, Zorin brought proceedings against Gany Holdings and Asif for disclosure of information and accounts in the British Virgin Islands. Ultimately, the issue was appealed to the Privy Council, and concerned issues of:

  1. what assets were transferred into the trust before Mr. Rangoonwala’s death; and
  2. whether the trustee’s distribution of the entirety of the Trust to one beneficiary after the settlor’s (Mr. Rangoonwala) death could be set aside on the basis that the trustee misunderstood the assets of the Trust.

The Privy Council held that the correct approach was a common-sense consideration of available evidence, taking into account:

  1. where the settlor makes known their intentions in a written or oral declaration, that is generally decisive;
  2. in absence of any declaration, consideration of evidence that may infer intentions of the settlor;
  3. as last resort, the Court may consider legal presumptions.

The Privy Council found that the conflicting evidence given by Asif and Gany Holdings as to the assets of the fund showed that the trustee had failed to appreciate the assets of the Trust; the lack of appreciation and investigation amounted in a breach of fiduciary duty. The Court found that the Trust, in fact, held valuable company shares resulting from Mr. Rangoonwala’s divesting himself of control and ownership of his successful business, and that it was his intention for the assets to become assets of the Trust. Consequently, the Court exercised its discretionary powers to set aside the trustee’s distribution of the entire funds to Asif.

It can clearly be seen from this case that it is important for all parties, particularly trustees to document decisions and avoid distributions where there is confusion over the assets held by the Trust. The nature and value of the Trust is also important knowledge to trustees. In any case, it is better to take preventative measures, rather than engage in stressful, time consuming, and expensive challenges in the future.


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.

Originally published on STEP Hong Kong – Winter 2020 Newsletter

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